Canadian Tax Journal, Vol. 56, No. 3, 2008

canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3, 661 - 707

The Dividing Line Between the Jurisdictions of the Tax Court of Canada and Other Superior Courts

David Jacyk*

P r é c i s Le droit fiscal est sans aucun doute l’une des branches du droit les plus exigeantes et les plus complexes au Canada. On pourrait penser qu’en matière de droit fiscal, la question de la juridiction des tribunaux se pose très simplement en ces termes : quel tribunal peut statuer sur les affaires qui concernent l’administration de la législation fiscale? Pourtant, cette question à elle seule a fait l’objet d’un grand nombre de litiges depuis des décennies, devant différents tribunaux de première instance et d’appel partout au Canada, ce qui montre bien la complexité de la question de la compétence des tribunaux dans un état fédéral, et ce, même dans un domaine de droit comme la fiscalité qui est pourtant bien circonscrit. L’abondance de jurisprudence sur la question de la juridiction est particulièrement importante depuis quelques années, et elle comporte plusieurs décisions des cours d’appel qui ont contribué à éclaircir davantage cette question. Ce nouvel éclairage a donné lieu à des développements très appréciés. En reconstituant l’évolution du droit dans ce domaine, le présent article brosse un portrait détaillé et complet du droit et propose une analyse qui s’appuie sur les étapes suivantes :

n l’examen de la structure des tribunaux fédéraux et en fiscalité; n la reconstitution de l’évolution de la jurisprudence aussi bien avant qu’après la réorganisation au fédéral du réseau des cours d’appel en fiscalité de 1991; n la prise en compte des décisions des tribunaux provinciaux qui se sont penchés sur cette question de façon indépendante du réseau des tribunaux fédéraux; n la prise en compte de l’ensemble des décisions en matière de rectification, un domaine qui a donné lieu à mon avis à des anomalies, mais des résultats tout de même gérables et prévisibles;

* Of the Department of Justice, Ottawa. The views expressed in this article are mine alone and are not to be attributed in any way to the Department of Justice, the Canada Revenue Agency, or the government of Canada generally. The article provides a scholarly overview of the law and is not intended to be legal advice; readers should consult the relevant case law and legislation, or obtain an independent professional opinion, in considering how the law may apply in a particular case. I thank the many individuals who reviewed drafts of the article, and particularly Lisa Macdonell for her insightful comments on the subject matter.

661 662 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

n la prise en compte des développements dans les décisions récentes en matière d’abus de procédure et de révision judiciaire, qui ont, il me semble, bel et bien apporté plus de précisions sur les paramètres détaillés des compétences de la Cour canadienne de l’impôt et des autres cours supérieures du Canada; n la présentation d’un résumé des principes extraits de la jurisprudence concernant la démarcation des compétences entre la Cour canadienne de l’impôt et les autres cours supérieures au Canada.

A b s t r a c t Tax law is arguably one of the most challenging and complicated areas of the law in Canada. One might expect that one of the simplest and most straightforward questions in the area of tax law would be that of jurisdiction: Which court can adjudicate issues relating to the administration of tax legislation? Surprisingly, this very question has been the subject matter of much litigation for decades, in trial and appellate courts across Canada, illustrating the complexity of the issue of court jurisdiction in the context of a federal state, even in a well-defined area of the law such as taxation. The volume of jurisprudence on the issue of jurisdiction has been high in the last few years, and includes several decisions from appellate courts that have brought greater clarity to this issue. The clarity brought to bear is a welcome development. This article provides a comprehensive review and analysis of the law on jurisdiction by

n reviewing the structure of the Tax Court and the Federal Court; n tracing the development of the case law prior to and following the reorganization of the federal tax appeal system in 1991; n considering the decisions of provincial courts that have tackled the issue independently of the federal court system; n considering the body of rectification cases, an area that, I argue, has created anomalous but nevertheless manageable and predictable results; n considering the developments in recent abuse-of-process and judicial review cases, which, I suggest, have definitively and emphatically clarified the fine parameters of the jurisdictions of the Tax Court and of the other Canadian superior courts; and n providing a summary of principles extracted from the jurisprudence regarding the demarcation of jurisdiction between the Tax Court and the other Canadian superior courts.

Keywords: Jurisdiction n court cases n tax court of Canada n Appeals n federal court n courts n provincial n Rectification

C o n t e n t s Introduction 663 Organization of the Tax Court and the Federal Court 665 Historical Organization 665 Scope of a Tax Appeal 667 Federal Court Decisions Before the 1991 Reorganization 668 The Federal Court Sets the Parameters 668 Impact of Subsection 152(8) of the Income Tax Act 671 Distinguishing the Merits of an Assessment from Post-Assessment Liability 673 the jurisdictions of the tax court of canada and other superior courts n 663

Post-1991 Decisions—Defining the Scope of Tax Appeals 674 Refining the Subject Matter of Tax Appeals 675 Collection Cases—Revisiting Optical Recording? 677 Jurisdiction of the Tax Court Versus Provincial Superior Courts 680 The Tax Court Affirms Its Jurisdiction over Certain Matters Involving Provincial Law 680 The Provincial Superior Courts Weigh In 681 Provincial Superior Courts Decline Jurisdiction 685 Rectification Cases—Equity Finds a Backdoor in Tax Cases? 686 Abuse-of-Process Cases 691 The Tax Court on Abuse of Process 692 The Federal Court of Appeal Clarifies the Line 694 Recent Judicial Review Decisions 697 Recent Class Action Cases 700 The Addison & Leyen Decision 702 Conclusion 704

Introduction While tax law is arguably one of the most challenging and complicated areas of the law in Canada, one might expect the question of the jurisdiction of the various courts over tax matters to be quite straightforward. Stated simply, which court has the authority to adjudicate the various issues relating to the administration of tax legislation? Surprisingly, this very question has been the subject matter of litigation for decades, in both trial and appellate courts across Canada. The volume and range of cases in which it has arisen illustrates the complexity of the issue of jurisdiction in a federal context, even in such a well-defined area of the law as taxation. In fact, it is not as easy as one might think to determine how closely an issue must relate to tax assessment in order to fall within the jurisdiction of the Tax Court of Canada. The important determination of which court to go to, which form of proceeding (if any) to initiate, and what kind of relief to seek must be made in consideration of all the relevant case law in its proper context, and in the context of the specific situation. Over the last few years, there has been a spate of decisions from appellate courts—including judicial review cases in the Federal Court and abuse-of- process cases—that have addressed the question of jurisdiction, bringing further clarity to the proper boundaries of each court’s jurisdiction. The various types of tax-related matters that will be discussed in this article can generally be classified under the following broad categories:

1. matters that involve the application of one or more specific charging provisions that determine a tax liability within a particular tax year, leading to a fixing of liability by an assessment; 2. matters relating to the calculation or recovery of a tax liability for a tax year after it is originally fixed by an assessment (“collection” matters); 3. procedural matters that are usually addressed by the provisions of the taxing legislation and that relate to the minister’s authority to raise the assessment, 664 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

such as the legal effect of a waiver permitting assessment after the expiry of a limitation period, or the validity of a certification under the taxing legislation; 4. matters relating to the process leading to the assessment, such as the conduct of an official within the assessment process or compliance with a test-case agreement; and 5. other legal or factual determinations normally resolved by provincial law that define a taxable event or transaction and that dictate a tax outcome.

In order to ascertain the lines demarcating jurisdiction in relation to these different types of tax-related matters, one must first understand the history of the Tax Court and its relationship to the Federal Court and other superior courts. Accord- ingly, this article begins with a brief review of the historical structure of the federal tax appeal system and the case law prior to the reorganization of that system in 1991, which led to the creation of a Tax Court with exclusive jurisdiction over tax appeals. The cases from this era are still touchstone decisions in cases involving jurisdiction, but as I will explain, they cannot be read in isolation from the refinements and developments in later cases. Against this background, I will then review, in turn,

n the development of case law in the first few years following the reorganization in 1991, when the courts refined the subject matter properly within an appeal to the Tax Court; n decisions in the mid-1990s relating to collection matters; n decisions of the provincial courts that have considered the issue of jurisdiction independently of the federal court system (usually with consistent results); n decisions in rectification cases, which in my view have produced anomalous, but nevertheless manageable and predictable, results; and, finally, n decisions in the recent spate of abuse-of-process and judicial review cases, which, I suggest, have definitively and emphatically clarified the fine parameters of the jurisdiction of the Tax Court and of the other Canadian superior courts.

The review of the jurisprudence is organized by a mixture of topics and general chronology. As the outline above suggests, the various issues relating to jurisdiction have seemed to arise in distinct clusters at certain periods of time, making it that much easier to track the development of the law. The review of the case law includes a very detailed analysis of the relevant cases,1 for several reasons. First, a close analysis of the decisions helps to inform the progress and development of the law in this area. Second, the background facts of each case shed light on the sometimes fine but, as I argue, clear distinctions demarcating jurisdiction. Last, a thorough review

1 I note, however, that I have also tried to limit the details of each case to those that are important to the issue of jurisdiction; therefore, the reader should consult the case before drawing any conclusions about the factual context. the jurisdictions of the tax court of canada and other superior courts n 665 of the details of each case helps to explain what appear to be irregularities that might be subject to misinterpretation.

Organiz ation of the Ta x Court and the Feder al Court Historical Organization2 Prior to 1946, the Exchequer Court had exclusive original jurisdiction to hear tax appeals. For a short period between 1946 and 1950, original jurisdiction was transferred to the Income Tax Appeal Board, with appeals to the Exchequer Court. By 1950, tax appeals proceeded in either the Tax Appeal Board or the more formal Ex- chequer Court. By 1971, the jurisdiction to hear appeals under the federal Income Tax Act,3 and other tax matters, was shared between the Tax Review Board (which replaced the Tax Appeal Board in 1971)4 and the Trial Division of the Federal Court of Canada (“the Federal Court”). The Tax Review Board became the Tax Court of Canada (“the Tax Court”) in 1983.5 Where an appeal was commenced in the Tax Court, the taxpayer was entitled to a trial de novo in the Federal Court. Prior to 1990, section 29 of the Federal Court Act6 precluded a right of judicial review by the Federal Court of a decision of a federal board, commission, or tribunal under section 18 where Parliament had expressly provided for an appeal to, among other bodies, the Federal Court. A decision of a federal board, commission, or tribunal, including a minister, could not be reviewed, set aside, or otherwise dealt with to the extent that it could be appealed to the Federal Court, or under another Act. Since there was provision for appeals of tax assessments to either the Federal Court or the Tax Court, section 29 was eventually interpreted as precluding judicial review of the minister’s decision to issue a tax assessment.7 A taxpayer’s choice of tax appeal avenues was thus limited to an appeal to the Tax Court or an appeal directly to the Federal Court Trial Division, since judicial review under section 18 of the Federal Court Act was not available. The Federal Court Act was amended in 1990, adding (among other changes) section 18.1, pertaining to applications to the Federal Court for judicial review,

2 Much of the information in this section has been extracted from Gordon Bourgard and Robert McMechan, Tax Court Practice (Toronto: Thomson Carswell) (looseleaf ) and the Web site of the Tax Court of Canada: http://www.tcc-cci.gc.ca/history_e.htm. 3 SC 1970-71-72, c. 63. Unless otherwise stated, references to the Income Tax Act in this article are to the current version of the statute, RSC 1985, c. 1 (5th Supp.), as amended. 4 The Tax Review Board was established by Bill C-174, enacted by SC 1970-71-72, c. 11. 5 Tax Court of Canada Act, SC 1980-81-82-83, c. 158. 6 RSC 1985, c. F-7, as amended; renamed the Federal Courts Act, SC 2002, c. 8, section 14. 7 See Bechthold Resources Ltd., infra note 26 and the accompanying text. The decision to issue an assessment is, of course, distinct from other administrative decisions of the minister, such as decisions under the “fairness package,” for which judicial review lies with the Federal Court. See, for example, Lanno v. CCRA, 2005 DTC 5245 (FCA). 666 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 and section 18.5, replacing section 29 and including an explicit reference to appeals to the Tax Court of Canada.8 The jurisdictional dividing line was reinforced by the new Tax Court of Canada Act, which came fully into effect in January 1991.9 Sec- tion 12 established the exclusive jurisdiction of the Tax Court to hear and determine matters under the Income Tax Act, among other statutes. Tax appeals could therefore no longer be taken to the Trial Division of the Federal Court.10 The addition of section 18.5 of the Federal Court Act, with its explicit reference to the Tax Court of Canada, maintained the bar on any judicial review of an assessment based on the tax appeal provided for under the Income Tax Act. The Tax Court of Canada was originally established as a statutory court, and was therefore without any jurisdiction in equity.11 In 2003, the Courts Administration Service Act came into force,12 establishing the Tax Court of Canada as a superior court of record. Despite this development in the court’s status, the Tax Court has given some reassurance that its newer role as a superior court of record does not significantly affect the nature of its jurisdiction over tax matters, or, apparently, the division between the jurisdictions of the Federal Court and the Tax Court.13 The Tax Court’s exclusive jurisdiction in tax appeals is therefore still restricted to determining the merits of the assessment. This exclusive jurisdiction to determine the correctness of tax assessments is not surprising given the effect of subsection 152(8) and section 169 of the Income Tax Act, which together deem an assessment to be valid and binding unless varied or vacated in accordance with the objection and appeal process under the Act. The exclusive jurisdiction of the Tax Court is therefore established by a combination of subsection 152(8) and section 169 of the Income Tax Act, section 12 of the Tax Court of Canada Act, and sections 18, 18.1, and 18.5 of the Federal Courts Act.

8 8 SC 1990, c. 8, section 5. Section 29 did not refer specifically to the Tax Court of Canada. In other respects, the wording of section 18.5 and section 29 was essentially the same. 9 Tax Court of Canada Act, SC 1988, c. 61. Although given royal assent on September 22, 1988, only those parts of the statute that related to the bench and the rules committee came into force on that date. The other provisions of the new Act were proclaimed in force effective January 1, 1991. 10 Section 18.24 of the Tax Court of Canada Act, applicable to appeals instituted after January 1, 1991. 11 Hamilton v. The Queen, 2007 DTC 121, at paragraph 8 (TCC); and Smith v. MNR, 89 DTC 299; [1989] 1 CTC 2413 (TCC). 12 SC 2002, c. 8; in force July 2, 2003. 13 See Pintendre Autos Inc., infra note 69. In GLP NT Corporation, infra note 102, Cumming J of the Ontario Court seemed to suggest that the Tax Court’s ability to determine the legal status of certain shares in the course of determining a tax appeal arose from the Tax Court’s new status as a superior court of record. However, on the basis of the Tax Court decision in Roper, infra note 76, decided before the Courts Administration Service Act came into force, the Tax Court already had the ability to make findings relating to provincial law that were necessary in determining whether the assessments were valid. These three decisions are discussed in further detail below, in the text accompanying the respective note references cited here. the jurisdictions of the tax court of canada and other superior courts n 667

Scope of a Tax Appeal Before trying to demarcate the jurisdiction of the Tax Court against that of other superior courts, it is important to understand the general parameters of the tax appeal process. One of the touchstone cases from the era of the Exchequer Court is the Supreme Court of Canada decision in Johnston v. Minister of National Revenue.14 That case is often cited for the principle that assumptions of fact made by the minister in his pleading are deemed to be true. It thus affects what has been termed a “reverse onus,”15 whereby the taxpayer is obliged to “demolish” those assumptions in order to establish that the facts on which the assessment is based were wrong.16 However, the Johnston case also clarified the function of the Tax Court with respect to a tax assessment. In discussing the issue of onus, Rand j stated that the court considers the evidence adduced before the court even if that evidence was not before the minister at the time of the assessment.17 A tax appeal in this sense is a trial de novo, where the trier of fact determines whether or not the taxpayer adduces enough evidence to support his interpretation of the relevant taxing provision(s). This is of course different from certain judicial review proceedings where the Federal Court reviews the reasonableness of the minister’s decision. Since it is not the Tax Court’s function to review the reasonableness of the minister’s decision,18 the court’s focus is to consider the evidence before it to determine whether or not the taxpayer’s situation fell within the statutory provision that was applied by the minister in making the assessment.19 A second case that provided early guidance to the tax appeal process was the 1959 Tax Appeal Board decision in Guay v. mnr.20 The decision confirmed that the board could re-examine the facts but had no jurisdiction to cancel a legal act involving rights falling within the jurisdiction of a province. The board found that if a contract had not been cancelled by a court of the province with jurisdiction, the minister was bound by the contract. The decision thus confirmed that the board could not be

14 [1948] SCR 486. 15 See, for example, Anchor Pointe Energy Ltd. v. The Queen, 2006 DTC 3365, at paragraph 21 (TCC), and the decision of the Federal Court of Appeal allowing the appeal, 2007 DTC 5379, at paragraph 28, where the court referred to the “initial onus of disproving, on a balance of probabilities, the facts that the Minister assumed.” (Leave to appeal to the Supreme Court of Canada was refused, SCC file no. 32157.) See also The Queen v. Anchor Pointe Energy Ltd., 2003 DTC 5512, at paragraphs 2 and 23 (FCA). 16 See, for example, Hickman Motors Ltd. v. The Queen, [1997] 2 SCR 336, at paragraph 92, per L’Heureux-Dubé J; and Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, at paragraph 25, per LeBel J. 17 See AG of Canada v. Buchanan et al., 2002 DTC 7397, at paragraph 18, where, in the same context, the Federal Court of Appeal cites the reasons of Rand J in Johnston. 18 Buchanan, supra note 17, at paragraph 18. 19 In effect, it is not particularly relevant whether or not the minister had committed any errors in coming to the decision to assess, but only whether the assessment is correct in law. 20 59 DTC 12, at 16 and 17 (TAB). 668 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 used as a forum for the pursuit of lawsuits. This is a principle that has endured to the present day, and is applicable to the Tax Court of Canada.21 The issue of exactly where the Tax Court’s jurisdiction ends and that of the provincial superior courts or the Federal Court begins is one that has evolved slowly, and with increasing precision. In a 1970 decision, The Queen v. J.B. & Sons Co. Ltd.,22 the Supreme Court of Canada considered the dividing line between the Tax Court and provincial superior courts. In that case, the Ontario Supreme Court had rendered a decision interpreting the terms of a contract to determine which one of the contracting parties was liable for the sales tax under the Excise Tax Act. The Crown was not a party to that proceeding. Upon a subsequent petition filed by one of the contracting parties in the Exchequer Court of Canada contesting its tax liability,23 Cattanach j determined that while he would have found differently than the Ontario Supreme Court if the matter had been brought before the Exchequer Court initially, he was nevertheless bound by the Ontario court decision by virtue of the principle of judicial comity between courts of coordinate jurisdiction. In allowing the appeal and overturning the decision of Cattanach j, the Supreme Court of Canada held that the Exchequer Court and the Ontario Supreme Court were not of coordinate jurisdiction regarding the liability for tax. The majority determined that although the provincial court had the jurisdiction to determine the rights of litigants in relation to a matter of private law, it could not go so far as to determine the claim against the Crown for taxes.24 The majority rejected the argument that the judicial obligation of comity between courts of coordinate jurisdiction would apply in the circumstances of the case. The Supreme Court of Canada therefore recognized a rudimentary dividing line between provincial superior courts and the federal taxation court, but one that needed to be developed more precisely in subsequent years.

Feder al Court Decisions Before the 1991 Reorganiz ation The Federal Court Sets the Parameters As will be seen, the leading cases establishing the parameters of the Tax Court’s jurisdiction were cases where the nature of the assessments was closely tied to collection proceedings. The first two touchstone cases on the issue of jurisdiction, mnr

21 See, for example, Obonsawin v. The Queen, infra note 123 and the accompanying text. 22 [1970] SCR 220. 23 The general scope of jurisdiction at the time was similar to that which exists today. The method of contesting payment of taxes was to file a petition in the Exchequer Court, which had exclusive jurisdiction (under section 18(1)(d) of the Exchequer Court Act, RSC 1952, c. 98) to determine claims against the Crown. See J.B. & Sons Co. Ltd., supra note 22, at 226. 24 J.B. & Sons Co. Ltd., supra note 22, at 226, majority decision delivered by Judson J, essentially adopting the reasons delivered by Pigeon J that came to the same conclusion on this issue (ibid., at 232-33). A third judgment was issued by Cartwright CJ, which came to the same result on a slightly different analysis. the jurisdictions of the tax court of canada and other superior courts n 669 v. Parsons et al.25 and Bechthold Resources Limited v. mnr,26 were decided in 1984 and 1985 respectively. In Parsons, the minister assessed directors of a corporation under subsections 159(2) and (3) of the Income Tax Act because they had failed to obtain a clearance certificate in relation to the corporation’s tax before issuing a dividend. The taxpayers chose not to file notices of objection from the assessments under the scheme of the Act, but rather applied to the Federal Court Trial Division for an order quashing the assessments for lack of legal authority. The taxpayers were successful in obtaining relief at the Federal Court Trial Division;27 however, the Federal Court of Appeal allowed the Crown’s appeal. In oral reasons delivered by Pratte ja, the Court of Appeal confirmed that such relief could not be granted by the Federal Court Trial Division on the basis that the assessments could only be challenged through the objection and appeal process set out in the Income Tax Act. The court specifically referred to section 29 of the Fed- eral Court Act (the predecessor of section 18.5 of the current Federal Courts Act). In particular, the court rejected the trial judge’s finding that section 29 did not deprive the Federal Court of jurisdiction. The trial judge had accepted the taxpayer’s argument that section 29 precluded review of questions of “quantum and liability” but not the more fundamental question of the minister’s legal authority. However, the Court of Appeal found to the contrary:

The learned judge of first instance held that, in this case, section 29 did not deprive the Trial Division of the jurisdiction to grant the application made by the respondents under section 18 of the Federal Court Act because, in his view, the appeal provided for in the Income Tax Act was restricted to questions of “quantum and liability” while the respondent’s application raised the more fundamental question of the Minister’s legal authority to make the assessments. We cannot agree with that distinction. The right of appeal given by the Income Tax Act is not subject to any such limitations.28

The Federal Court Trial Division came to a similar conclusion in its decision in Bechthold Resources. The assessment in that case (and in several subsequent cases involving questions of jurisdiction) related to the scientific research and development tax credit scheme under the Income Tax Act. This is a scheme in which assessment is closely connected to the collection of amounts payable when due. In Bechthold Resources, upon the issuance of certain qualifying securities, the taxpayer designated an amount of $30 million in relation to scientific research tax credits, pursuant to subsection 194(4) of the Act. The designation made by the taxpayer resulted in $15 million of tax payable under part viii of the Act, equalling 50 percent of the total amount designated (which was refundable if certain conditions were met). When no

25 84 DTC 6345 (FCA). 26 86 DTC 6065 (FCTD). 27 83 DTC 5329 (FCTD). 28 Supra note 25, at 6346. 670 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 payment was made within three months of the designation, the Canada Revenue Agency (CRA)29 issued an assessment in the same tax year—that is, prior to the date by which the taxpayer was ordinarily required to file a return. After 90 days had passed from the date of the assessment and still no payment had been made, the CRA sought to recover $15 million, and accrued interest, by issuing a requirement to pay (a form of statutory garnishment) to a third party. Two other requirements to pay were issued prior to the end of the fiscal year of the company in which the designation was made. The taxpayer made an application for certiorari under section 18 of the Fed- eral Court Act to quash the assessment, taking the position that the assessment was a nullity on the basis that it had been issued prior to the end of the taxpayer’s fiscal year. The Bechthold Resources case is somewhat different from Parsons in that the taxpayer challenged not only the assessment, but also the subsequent decision to issue the requirements to pay under section 224 of the Income Tax Act, a collection provision. The taxpayer tried to distinguish the Parsons decision, arguing that its request for certiorari was based on a challenge to the minister’s jurisdiction to issue the assessment and requirement to pay, rather than the issue of whether the assessment was proper in law. Addy j rejected this distinction, finding that a lack of authority to make an assessment necessarily involved a lack of jurisdiction.30 He concluded that such a question could only be raised in the context of a regular tax appeal to the Tax Court, or to the Federal Court Trial Division.31 Although the court went on to review the validity of the assessment and the garnishment,32 it did not consider whether the garnishment under subsection 224(1) itself could be attacked by way of judicial review for reasons other than the merits of the underlying assessment. Once again, the facts of the case had linked the separate issues of assessment and collection. Parsons and Bechthold Resources were decided over 20 years ago but they remain touchstone decisions to this day. It is important to note a few aspects of these cases. First, in both cases, the taxpayers apparently chose to apply for declaratory relief at the Federal Court Trial Division, rather than initiate a tax appeal. There was therefore no discussion as to whether the issue was res judicata. This was a concept that was alluded to in later cases, creating the potential for some confusion on the issue of jurisdiction (a point that I address later). Second, these cases were decided on the basis of section 29 of the Federal Court Act (before the Tax Court was granted exclusive jurisdiction under section 12 of the current Tax Court of Canada Act), and

29 In this article, predecessors of the present Canada Revenue Agency are referred to by this name, or by the abbreviation “the CRA.” 30 Supra note 26, at 6068. 31 This case predated the legislation establishing the exclusive jurisdiction of the Tax Court in matters arising under the Income Tax Act (section 12 of the current Tax Court of Canada Act). 32 Apparently it did so for practical purposes: see Bechthold Resources Limited, supra note 26, at 6068. the jurisdictions of the tax court of canada and other superior courts n 671 neither decision mentions the impact of subsection 152(8),33 even though the court in Bechthold discussed the significance of section 152 for other reasons. Most importantly, the Parsons decision in particular is a good example of the clarity of thought exercised by the court on this important issue. Because of inter- actions between tax matters and other areas of the law (including, for example, property law, commercial law, and insolvency law, to name only a few), there are many situations in which it may be argued that a legal issue falls somewhere outside the Tax Court’s jurisdiction, and thus within the jurisdiction of another superior court. The fundamental question is always whether the claim or application in any way challenges or undermines the quantum or validity of the tax assessment. This is the narrow question on which courts must focus to determine whether the applicant is asking a court to cross the line and intrude upon the exclusive jurisdiction of the Tax Court. Neither the specific relief sought by the applicant nor the fact that the proceeding is a lawsuit should ever cloud this fundamental issue. Any attempt to distinguish a case on these grounds should therefore be rejected, as it was in the Parsons case.

Impact of Subsection 152(8) of the Income Tax Act The significance of subsection 152(8) of the Income Tax Act was finally addressed in 1991, in the Federal Court of Appeal decision in Optical Recording Corp. v. Canada.34 That case dealt with the refundable part viii tax under subsection 195(2), which required payment of 50 percent of the amount designated pursuant to subsection 194(4) relating to scientific research and development credits. At the time, the CRA initiated collection action shortly after the payment was due, but indicated to the taxpayer that it would modify that practice if the corporation could satisfy the CRA that it could eliminate the tax liability by the end of the year or provide security for payment.35 Neither of those conditions was satisfied in this situation. Subsequently, the minister issued requirements to pay to third parties and additionally registered the tax debt as a certificate in the Federal Court pursuant to section 223 of the Act. The taxpayer brought an application seeking a writ of certiorari to quash the notice of assessment, the requirements to pay, and the certificate, and also sought a writ of prohibition against the continuation of any collection proceedings “until it is lawful to do so.”36

33 In Parsons, supra note 25, the Federal Court of Appeal did not refer to subsection 152(8) or its predecessor subsection 46(7) of the 1952 Act (RSC 1952, c. 148), which was worded identically. However, the court clearly based its decision on the premise that a taxpayer must resort to the objection and appeal process described in section 169, making the omission of any reference to subsection 152(8) insignificant. (Also see the trial decision of Cattanach J, supra note 27.) 34 [1991] 1 FC 309 (CA). 35 Ibid., at 313-14. 36 [1987] 1 FC 339, at 343 (TD). 672 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

The Federal Court Trial Division granted the relief sought, finding that it had jurisdiction to deal with issues of “fundamental administrative illegality” and “unfair treatment.”37 The Federal Court of Appeal overturned the decision, finding that the Federal Court Trial Division did not have jurisdiction to entertain the originating motion brought under section 18 of the Federal Court Act. In its decision, the Court of Appeal referred to subsection 152(8) in support of the proposition that the assessment was deemed to be valid unless it was successfully challenged under the appropriate objection and appeal process. This reference to subsection 152(8) later proved to be helpful, particularly in cases involving actions for damages in other superior courts where the underlying premise of the action was that the assessment was wrong. The court also found that section 29 of the Federal Court Act precluded such an application.38 There are a few other interesting aspects of the decision in Optical Recording, which took on greater significance in later decisions. The first relates to collection proceedings. The Court of Appeal went so far as to say that section 29 of the Federal Court Act precluded not only an application challenging the assessment itself, but also “the collection proceedings or actions taken in respect of those deemed valid assessments.”39 This perhaps gave rise to some confusion as to whether or not a legitimate issue regarding the validity of a statutory collection instrument, such as the certification of the debt or a “requirement to pay,” could be attacked by way of judicial review in the Federal Court, since it could not be raised in the Tax Court. If one were to interpret this finding broadly, it could mean that for any issues other than the validity of the original assessments, there would be no forum in which a taxpayer could challenge collection proceedings. However, when this finding is considered in the context of the case, the Court of Appeal likely meant that there was no challenge to collection proceedings available under section 18 if the only issue raised related to the merits of the underlying assessments. It must also be recalled that, because of the nature of the scientific development research scheme, the assessments were closely linked to collection, since collection steps were initiated immediately after the expiry of the period for payment of the part viii tax. The second interesting aspect of the Optical Recording decision relates to challenges based on abuse-of-process allegations. The trial judge found that the applications raised issues of “fundamental administrative illegality, unfair treatment and estoppel.”40 This seemed to hint at a distinction between the process of the assessment

37 Ibid., at 351. 38 In so doing, the court appeared to put the final nail in the coffin of the decision in WTC Western Technologies Corporation v. MNR, 86 DTC 6027 (FCTD). That decision had been found by the motions judge to conflict with the decision in Bechthold Resources Limited. 39 Supra note 34, at 321. 40 Supra note 36, at 351. the jurisdictions of the tax court of canada and other superior courts n 673 and the substance of the assessment, a point that was brought into greater focus in later cases. In fact, the trial judge ultimately found that the CRA’s policy of not in- sisting on payment under the Income Tax Act but allowing voluntary arrangements was illegal.41 The Federal Court of Appeal did not deal extensively with the lower court judge’s manner of distinguishing the Parsons decision, but rather provided reasons why the collection arrangements were not illegal.42 Therefore, although the Court of Appeal found that the trial judge had erred in failing to consider the nature of the minister’s power to accept security for payment under subsection 220(4) of the Income Tax Act, the court did not address the possibility that there might be an issue of process only, which did not challenge the assessment itself. The court thus did not seem to distinguish this aspect of the claim, or perhaps was not prepared to sever the collection issue from the rest of the claim, which it eventually struck. This was perhaps due to the fact that the taxpayer had asked the Federal Court to quash the notice of assessment itself, in addition to the requirements to pay and the certificate.43 Irrespective, clarification as to how issues relating to abuse-of-process allegations or collection proceedings were to be resolved was left to later cases. As a result, while the Parsons, Bechthold Resources, and Optical Re- cording cases are still the starting point for addressing any jurisdictional issue, they cannot be read in isolation from the refinements and developments in later cases.

Distinguishing the Merits of an Assessment from Post-Assessment Liability Only a few months after its decision in Optical Recording, the Federal Court of Ap- peal had an opportunity to clarify the Federal Court’s ability to hear challenges arising from collection proceedings as distinct from those relating to the correctness of the assessment. In City Centre Properties Inc. v. The Queen,44 the Federal Court of Appeal confirmed that the Federal Court Trial Division did have the jurisdiction to entertain applications for declaratory relief where the issue as to liability did not depend on the alleged invalidity of the assessment. In that case, the minister reassessed the taxpayer’s predecessor company for $125,681.45 The taxpayer commenced an action against a third-party company that had agreed to indemnify the taxpayer for the recovery of the amount reassessed. The third-party company then filed a notice of objection to the reassessment and provided the minister with a bank guarantee for half of the assessed amount as security. After the bank guarantee expired

41 Ibid., at 355. 42 Supra note 34, at 321-24. 43 The court also noted that the shareholder of the company had failed to file a proper objection to the initial assessment. He apparently believed that the tax liability of the company would effectively be eliminated before the taxation year-end, and thus believed that he was not required to do anything in response to the notice of assessment. Ibid., at paragraphs 4, 5, and 19. 44 91 DTC 5083 (FCA). 45 See the reasons in the trial decision, 90 DTC 6080 (FCTD), for a description of the facts. 674 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 without any demand thereunder, the CRA made a demand for payment from the taxpayer of 50 percent of the tax liability. The taxpayer denied liability and sought an order from the Federal Court Trial Division for declaratory relief, arguing that the underlying tax had effectively been paid by virtue of the bank guarantee. The trial judge dismissed the action on the basis that the Federal Court did not have jurisdiction. The Court of Appeal, however, distinguished these proceedings from those in previous cases on the basis that the taxpayer did not take issue with the merits of the assessment. In fact (though this point was not specifically noted in the decision), the taxpayer had clearly accepted the amount as originally assessed; his argument was that he had a binding agreement with the CRA that reduced the debt to zero upon the provision of the bank guarantee. Whether or not the taxpayer’s position was correct, the issue that he raised was within the Federal Court’s jurisdiction for judicial review.46 The taxpayer only questioned whether or not the amount assessed was effectively paid down in accordance with the relevant provisions of the Income Tax Act. Although questions were later raised as to whether this marked a change in the law,47 the decision simply confirmed the dividing line between cases involving collection issues that could be brought as applications before the Federal Court, and cases involving a challenge to the basis for the original assessment, which were to proceed as tax appeals to the Tax Court or the Federal Court. A few months after the City Centre Properties decision, the revised Tax Court of Canada Act came into effect, establishing the exclusive jurisdiction of the Tax Court, and the Federal Court no longer had jurisdiction to hear new tax appeals. The issue of jurisdiction could now be considered in much starker terms: whether the specific case belonged in the Federal Court Trial Division at all, or whether it fell within the exclusive jurisdiction of the Tax Court of Canada.

Post-1991 Decisions—Defining the Scope of Ta x Appe al s The cases decided prior to the 1991 restructuring of the tax appeal system dealt primarily with situations where the nature of the assessments was tied closely to collection actions, such as the scientific research scheme where collection of the refundable tax could be initiated shortly after the designation, or the assessment of directors under subsection 159(2) as a means of recovering corporate tax liability. Nevertheless, all of those cases involved situations where there were fairly clear distinctions between matters that could be challenged within a tax appeal (such as the Parsons and Bechthold Resources cases), and issues that could not be addressed within a tax appeal (the City Centre Properties case). Certain cases decided within a few years

46 Supra note 44: see the appendix to the reasons, where the declaratory relief sought by the taxpayer is reproduced. 47 See Albion Transportation Research Corp. v. Canada, [1998] 1 FC 78, at paragraphs 37-38 (TD), discussed below (infra note 60 and the accompanying text). the jurisdictions of the tax court of canada and other superior courts n 675 after the 1991 restructuring involved a broader range of situations, including applications for loss carryforwards, forms of certification, and the validity of waivers under the Income Tax Act. These cases required a more refined definition of the proper subject matter of tax appeals, and thus began to test more rigorously the scope of the Tax Court’s exclusive jurisdiction.

Refining the Subject Matter of Tax Appeals It was not long after the enactment of the revised Tax Court of Canada Act that the courts reaffirmed the application of the approach taken in the Parsons and Optical Recording decisions, in considering other issues that could be addressed within tax appeals. In Water’s Edge Village Estates (Phase ii) Ltd. v. The Queen,48 Dubé j of the Federal Court Trial Division found that the taxpayer could not proceed with an application for judicial review under section 18.1 of the Federal Court Act relating to the taxpayer’s request to carry forward certain losses. The taxpayer had in fact filed a proper objection under subsection 165(1) in respect of its 1988 tax year, but also brought an application for judicial review of the minister’s refusal to issue a refund for the 1990 tax year that would result from applying losses purportedly incurred in 1988 against income earned in 1990. The taxpayer’s motivation for choosing to seek judicial review was to obtain a decision more quickly so as to protect other partners in the business who had not yet been assessed. The court found that the Income Tax Act provided a complete code prescribing the procedure to be followed in such cases, and thus precluded a judicial review application. The decision clarified the Tax Court’s jurisdiction to hear tax appeals where the relief requested by a taxpayer involved carrying forward or, presumably, carrying back49 certain losses. Interestingly, no mention was made of section 12 of the Tax Court of Canada Act, though that was possibly because the tax years in question were prior to 1991. The issue of the court’s jurisdiction arose again in the Court of Appeal at the end of 1992 in the case of Brydges et al. v. mnr.50 The Federal Court of Appeal considered whether a tax appeal could also cover a matter of certification under the Income Tax Regulations. In the Brydges case, the CRA had provided the taxpayers with an

48 94 DTC 6284 (FCTD). 49 This was later clarified in Greene v. MNR, 95 DTC 5078 (FCTD). Interestingly, in Greene, on the taxpayer’s original application for mandamus to the Federal Court Trial Division, the minister agreed to a consent order to reassess the earlier years to which the taxpayer sought to carry back losses, to “take into account the deductions claimed” (ibid., at 5079). However, it should be noted that the minister had initially taken no action to consider the application to carry back losses. The minister agreed to consider the request to carry back losses and proceeded to reassess in a manner that did not recognize all of the losses claimed by the taxpayer. Rothstein J (as he then was) found that the taxpayer could only challenge those reassessments in the Tax Court, notwithstanding the original consent order issued by the Federal Court Trial Division. The result in Water’s Edge and Greene is logical, because in both cases the losses arising from the relevant tax year had not been accepted by the minister. 50 93 DTC 5007 (FCA). 676 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 advance ruling that certain videotaped programs would qualify as “certified short productions” under regulation 1104(2) (thus qualifying as class 12 assets subject to capital cost allowance) and would fall outside the scope of the leasing property rules in regulation 1100(15). In order to so qualify, the programs had to remain certified by the minister of communications as certified short productions. The minister of communications revoked the certificate after the producers were convicted of fraud. The taxpayer made an application to the Federal Court Trial Division under section 18 of the Federal Court Act to set aside the revocation.51 The Court of Appeal agreed with the trial judge’s view that the issue of the legality of the certification was part and parcel of the tax assessments, and thus could be addressed only within the context of a tax appeal. The court specifically relied on the fact that the certificate had no purpose or legal effect outside the scheme of the Income Tax Act itself. This was an interesting way of approaching the issue of jurisdiction, for three reasons. First, it inferred what I refer to as a principle of symmetry, in finding that jurisdiction could not exist under the Federal Court Act if a matter fell within the jurisdiction of the Tax Court.52 Second, it applied the reasoning in Parsons to a case where something other than the actual tax assessment itself was the direct focus of the relief sought. Third, it linked the issue of jurisdiction to the purpose of the certification. Because the purpose and effect of the certification lay solely within the scheme of the Income Tax Act, the appeal necessarily fell within the jurisdiction of the Tax Court.53 Within a few months, the Federal Court of Appeal again considered the parameters of a tax appeal in mnr v. Devor.54 In that case, the taxpayer had executed waivers relinquishing his right to appeal the assessments by the minister. He then filed a statement of claim seeking a declaration that the waivers were void, but also sought a writ of certiorari quashing the reassessments, on the basis that they had been issued outside the statutory limitation period. The minister’s motion to strike the statement of claim was dismissed both by the Federal Court prothonotary and by a judge of the Federal Court Trial Division.55 The Trial Division judge concluded that the Federal Court had a residual jurisdiction to supervise administrative acts for which there was no specific right of appeal under the Income Tax Act.56 This approach seemed to adopt a form of symmetry: that if the Tax Court of Canada had no jurisdiction over a specific matter, then it must necessarily reside with the Federal Court

51 Brydges et al. v. Kinsman et al., 90 DTC 6463 (FCTD). 52 This is really nothing more than a reflection of the effect of former section 29 (now section 18.5 of the Federal Courts Act). See also Devor, discussed below (infra note 54 and the accompanying text). 53 This provides an interesting comparison with the line of cases regarding rectification proceedings that followed a few years later, and are discussed below. 54 93 DTC 5098 (FCA). 55 88 DTC 6370 (FCTD). 56 Ibid., at 6374. the jurisdictions of the tax court of canada and other superior courts n 677

Trial Division (or other superior court). This is a concept that appears to have become more significant in later decisions. The Federal Court of Appeal was not persuaded by the taxpayer’s argument and allowed the appeal. The court was obviously influenced by the fact that the trial judge had relied on the trial decision in Optical Recording, which was later overturned.57 However, the court went on to deal with the nature of the waivers provided for in subsection 152(4) of the Income Tax Act. In allowing the appeal, Mahoney ja found that the validity of the reassessments depended on the validity of the waivers. There was therefore no reason why the grounds for invalidity (presumably including the invalidity of the waivers) could not be given effect in the appeal of the reassessments themselves. The court thus seemed to accept the symmetry approach, but simply found that the issue of the validity of the waivers fell within the jurisdiction of the Tax Court rather than that of the Federal Court Trial Division. In dismissing the appeal, the court found that the situation was not distinguishable from the issue of certification of short productions in the Brydges case.

Collection Cases—Revisiting Optical Recording? After the decision in Optical Recording, the issue of the ability and requirement to raise collection issues in the Federal Court was addressed by the Tax Court in 1995. In the decision in R.K. Liu v. The Queen,58 Bowman j (as he then was) addressed the Tax Court’s jurisdiction in a situation where a taxpayer claimed that an amount improperly withheld by an employer should reduce the balance owing for his income tax. The issue affecting the liability of the taxpayer was thus an issue of collection rather than an issue of assessment. While addressing the merits of the taxpayer’s position, the Tax Court also noted that it had no ability to grant relief or to determine the balance of tax owing by the taxpayer, since the matter was within the jurisdiction of the Federal Court.59 In 1998, the Federal Court Trial Division weighed in again on the issue of its jurisdiction over collection matters in Albion Transportation Research Corp. v. Canada.60 In that case, two related corporations and their two shareholders sued the CRA for wrongful seizure of monies from their bank accounts, which were seized pursuant to a requirement to pay and writs of fieri facias. The primary taxpayer, Albion Transportation Research Corp. (“Albion”), had been assessed for tax due under subsection 195(2) of the Income Tax Act. Although the assessment was issued less

57 Devor, supra note 54, at 5099. 58 [1995] 2 CTC 2971 (TCC). 59 Ibid., at paragraph 14. This general principle was more recently reiterated by the Tax Court in Curwen v. Canada, [2005] TCJ no. 176, where the court found that it had no jurisdiction to grant relief where the only issue was the amount withheld by the appellant’s employer and never remitted. See also Workum v. Canada (Customs and Revenue Agency), 2005 FC 991, where the Federal Court confirmed its jurisdiction to deal with an issue regarding the accounting of the initial tax liability. 60 Supra note 47. 678 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 than two months after the taxpayer made a scientific research designation under part viii of the Income Tax Act, no objection was ever filed by Albion. The debt of $15 million (half of the designated amount) was certified under section 223 of the Act, and writs of seizure were obtained. The Federal Court Trial Division took particular note of the Federal Court of Appeal’s 1990 decision in City Centre Properties, referring to the following comment by Mahoney ja:

This case is to be distinguished from this Court’s decision in mnr v. Parsons and The Queen v. Optical Recording Laboratories because the validity of the assessment is not challenged here. In each of those cases, the issue as to liability for income tax depended on the alleged invalidity of the assessment. In such a case, we have no doubt, the denial of liability can only be litigated by an appeal against the assessment as provided by the Income Tax Act.61

The reasons of Gibson j in Albion Transportation hinted that the Federal Court of Appeal’s decision in City Centre Properties may have marked a change in the law:

Based on the above passage, it is arguable that the Court of Appeal is restricting Optical Recording to situations where the validity of the tax assessment is directly under attack. The passage makes no mention of collection proceedings.62

As already mentioned, I do not believe that the Federal Court of Appeal was necessarily suggesting in Optical Recording that no action of the minister with respect to collection action could ever be attacked in the Federal Court, though one can see how it may have been misinterpreted. The court in Albion Transportation ultimately found that the situation of the plaintiff fell squarely within the parameters of Optical Recording, since the claim for wrongful seizure was based on the allegation that the CRA’s actions were without legal justification, and thus entailed an attack on the validity of the tax assessment itself.63 The comment that the Federal Court of Ap- peal may have taken a “step back” from its position in Optical Recording64 was thus obiter. Further, it is clear from other decisions that issues regarding the collection of tax cannot be raised in the Tax Court of Canada itself. Optical Recording therefore remains good law, though it ought not to be interpreted as precluding challenges to any form of collection action in the Federal Court. The issue of the ability to raise collection issues in the Federal Court has now been clearly resolved.65 The Court of Appeal has recently noted the limit on any

61 City Centre Properties, supra note 44, at 5084. 62 Albion Transportation, supra note 47, at paragraph 37. 63 Ibid., at paragraph 31. 64 Ibid., at paragraph 36. 65 Though there may still be debate as to which issues are purely collection matters and which issues are more intrinsic to the assessment itself. the jurisdictions of the tax court of canada and other superior courts n 679 overlap in the respective jurisdictions of the Tax Court and the Federal Court. In Walker v. The Queen,66 the taxpayer made an application for judicial review relating to collection action by the cra. The minister had issued a notice of assessment, but the taxpayer claimed that she had never received it, thus challenging whether it was ever sent. In deciding that the “legal efficacy” of a notice of reassessment could only be challenged in the Tax Court, the Court of Appeal alluded to an element of symmetry in the jurisdiction question:

Section 18.5 of [the Federal Courts] Act should be interpreted, as far as possible, to preclude parallel proceedings in the Federal Court and the Tax Court of Canada in respect of substantially the same underlying issue.67

The court also clarified that while an application could be made to challenge the legality of collection measures, the Federal Court’s jurisdiction did not extend to include an “attack on the underlying reassessment on which collection measures are based.”68 In so doing, it effectively clarified what may have been left unexpressed in its previous decision in Optical Recording. The Tax Court of Canada has confirmed that its newer role as a superior court of record will not afford it jurisdiction over collection matters. In Pintendre Autos Inc. v. The Queen,69 the minister made an application for a preliminary determination of law under section 58(1)(a) of the Tax Court of Canada Rules (General Proced- ure)70 as to whether the court could consider a fin de non recevoir under the Civil Code of Québec within the tax appeal. The taxpayer pleaded this defence, effectively claiming that the cra had omitted to alert the taxpayer as to shortfalls in its source deduction account, thus justifying a reduction of the debt. In concluding that the court did not have jurisdiction over collection matters, Paris j considered how section 3 of the Tax Court of Canada Act had changed the court’s jurisdiction.71 The decision suggested that the designation as a superior court provided the Tax Court of Canada with a “supervisory jurisdiction,” but did not broaden its jurisdiction beyond that of its enabling statute.72 The court also confirmed that the principle that matters relating to collection of tax were beyond the jurisdiction of the court73 re- mained unchanged, despite this designation.

66 2005 DTC 5719 (FCA). 67 Ibid., at paragraph 13. 68 Ibid., at paragraph 15. 69 2004 DTC 2596 (TCC). 70 Tax Court of Canada Rules (General Procedure), SOR/90-688, as amended. 71 Supra note 69, at paragraph 32. 72 Ibid., at paragraphs 32-33. 73 Ibid., at paragraph 42, citing the decision of Bowman J in Liu, supra note 58. See also Curwen, supra note 59. 680 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Jurisdiction of the Ta x Court Versus Provincial Superior Courts As noted earlier, there are many places where tax law can intersect with other areas of the law. As a result, the courts have had to grapple with the parameters of the jurisdiction of the Tax Court against that of provincial superior courts. Most of the key cases decided prior to 2000 dealing with the issue of jurisdiction were determined within the federal court system. One prominent exception was the 1992 decision in Longley v. Minister of National Revenue, where the British Columbia Court of Appeal found that an application for a declaration that section 245 of the Income Tax Act (the general anti-avoidance rule, or gaar) was unconstitutional could be heard in the British Columbia Supreme Court.74 That case did not appear to come within the Tax Court at all, since the underlying action related to an allegation of misfeasance of office,75 a matter dealt with later in this article. However, by around 2000, the issue of the Tax Court’s jurisdiction to determine matters trad- itionally dealt with in provincial superior courts came into clearer focus.

The Tax Court Affirms Its Jurisdiction over Certain Matters Involving Provincial Law The Tax Court addressed the dividing line between its jurisdiction and that of provincial courts in its 2000 decision in Roper v. The Queen.76 In Roper, the taxpayer purported to appeal an assessment for source deductions that arose prior to his filing a proposal under the Bankruptcy and Insolvency Act. The taxpayer’s appeal raised three issues. First, it challenged the cra’s ability to maintain a claim for source deduction arrears that arose prior to the proposal (“pre-proposal arrears”). Second, it asserted the taxpayer’s claim to an entitlement for input tax credits in respect of goods and services tax (gst), which could be applied to set off the pre-proposal

74 (1992), 66 BCLR (2d) 238 (CA). The majority found that the British Columbia Court of Appeal had the jurisdiction to grant a declaration sought in a statement of claim filed in the British Columbia Supreme Court that section 245 of the Income Tax Act was of no force and effect as allegedly breaching the Canadian Charter of Rights and Freedoms. In dissent, though agreeing that the court could grant such a declaration, Southin JA decided that the court should refuse to do so because the issue could be moot, depending on the outcome of the substantive issue that had to be determined by the Federal Court. In so finding, she determined that the BC court ought to dismiss the case as an abuse of the court’s process in accordance with the principle of judicial comity, given the Federal Court’s special expertise in matters of federal taxation: ibid., at paragraph 26. The Longley decision appears to have been tacitly approved in obiter dicta in American Express Bank Ltd. v. Price, etc. (1995), 1 BCLR (3d) 108, at paragraph 31 (CA). 75 Indeed, there was no assessment, and no potential for assessment. It appears that the taxpayer was seeking a written confirmation that his proposed tax plan did not breach the Income Tax Act, and complained, among other things, that the minister had not formally assessed certain individuals to disallow certain deductions, thus precluding any avenue of appeal. See Longley v. The Queen, 99 DTC 5549 (BCSC). 76 2000 DTC 2213 (TCC). the jurisdictions of the tax court of canada and other superior courts n 681 arrears. Third, it challenged the minister’s ability to assess penalties and interest for the arrears for source deductions.77 The minister applied for an order dismissing the appeal on the grounds that the notice of appeal dealt with matters outside the Tax Court’s jurisdiction. Mogan J dismissed the Crown’s application, finding that the court had jurisdiction over “at least part of the subject matter”78—specifically, the taxpayer’s challenge to the amount of penalties and interest assessed on the arrears for source deductions in the notices of assessment. In so finding, the court asked, “Where else could he challenge those amounts given the exclusive jurisdiction of this Court under section 12 of the Tax Court of Canada Act?”79 The court also found that it had jurisdiction to consider issues that were collateral to the appeal itself, including whether the pre-proposal arrears for source deductions were effectively extinguished by the Bankruptcy and Insolvency Act. In effect, the court needed to determine that issue in order to decide the third issue— whether the interest and penalties had been correctly assessed. The case thus confirmed that the Tax Court could determine matters that, though ordinarily falling within a provincial court’s jurisdiction, were not yet determined but were necessary to determine a liability that was assessed. Therefore, it does not seem that the Tax Court accepted that, irrespective of the circumstances, it had jurisdiction to determine whether the balance owing for the principal of the source deductions itself had been extinguished. Such a proposition would be difficult to reconcile with the obiter dictum in the Liu case. However, it is significant that the court specifically found that the issue of the minister’s ability to collect pre-proposal arrears could be considered as a matter collateral to the appeal, since it was raised in the context of an argument that the interest and penalties could not be assessed on source deduction arrears that arose prior to the bankruptcy proposal. In an obiter dictum, Mogan j inferred that the appellant could raise the second issue regarding the entitlement to a setoff of the tax debt against a gst refund.80 While this might appear, at least on its face, to be more a matter of collection than a matter of assessment, the underlying right to the setoff would have arisen directly from the taxpayer’s entitlement to certain input tax credits.81

The Provincial Superior Courts Weigh In Most of the significant case law on this issue prior to 2000 appears to have developed in the federal court system. In 2000, shortly after the Roper decision, the

77 Ibid., at paragraphs 3-4. 78 Ibid., at paragraph 8. 79 Ibid. 80 Ibid., at paragraph 10. This inference appears to be an obiter dictum because the court ultimately found that the taxpayer could not raise the GST issue since he had not filed a separate appeal for GST. 81 Ibid., at paragraph 11. 682 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

Ontario Superior Court considered the question of jurisdiction in another case involving interest—in this instance, unassessed interest. In Ho-A-Shoo v. ag of Canada et al.,82 the taxpayer had filed a statement of claim as a representative plaintiff in a class proceeding claiming damages. The plaintiff sought to recover an amount paid for unassessed interest arising from an assessment under section 160 of the Income Tax Act, which was ultimately the subject of a consent judgment from the Tax Court. On the Crown’s motion to dismiss the action, Cumming j found that the issue of unassessed interest was distinct from the issue of assessed interest, and was not one that fell within the Tax Court’s jurisdiction.83 The Ontario court characterized the cause of action as a separate cognizable cause of action based on unjust enrichment and restitution, which was not within the Federal Court’s exclusive jurisdiction.84 Accordingly, the court found that, on the basis of concurrent jurisdiction of the Federal Court and the superior courts of the provinces for claims against the Crown conferred by the Federal Court Act and the Crown Liability and Proceedings Act, it had jurisdiction over the claim.85 While the result in this case seems unusual, or even anomalous, it did relate to unassessed interest in very narrow circumstances where there was a perceived legislative “gap” in the specific provision.86 Consequently, this decision ought to have little, if any, application to other situations or cases. Within a few years of the Roper and Ho-A-Shoo decisions, the issue of jurisdiction was considered once again from the perspective of the provincial superior courts, this time at the appellate level. In Canada (Customs and Revenue) v. Aboriginal Feder- ated Alliance Inc.,87 the Alberta Court of Appeal clarified the test for drawing the line between the jurisdiction of a superior court and that of the Tax Court. In that case, the cra had asserted a claim to monies paid into court under an interpleader order

82 2000 DTC 6293; [2000] 2 CTC 155 (Ont. SCJ). 83 Ibid., at paragraphs 36-38. 84 Ibid., at paragraphs 44-46. 85 Section 17 of the Federal Court Act, RSC 1970, c. 10 (2d Supp.), as amended; and section 21 of the Crown Liability and Proceedings Act, RSC 1985, c. C-50, as amended. 86 This a term used by the court itself. The case went no further because it was resolved by a settlement approved by the court. See Ho-A-Shoo v. AG of Canada et al., 2001 DTC 5589, at paragraphs 11-12 (Ont. SCJ), where Cumming J noted: The plaintiff is able to achieve the settlement because of an apparent gap in statutory authority in respect of unassessed interest arising from an amount owed by a taxpayer under a s. 160(1) assessment. Under the terms of the settlement, CCRA [the CRA] has retained the right to seek to recoup from the transferor in respect of each of the class members any amounts that have been repaid to the class members by this settlement and to investigate whether there are any other transfers in respect of which s. 160 assessments can be issued. The judgment furthermore describes all of the extensive efforts made to identify any taxpayer who might have been affected by the issue, and those identified were included in the settlement. 87 2002 ABCA 104. the jurisdictions of the tax court of canada and other superior courts n 683 of the Alberta Court of Queen’s Bench. The cra’s claim reflected the amount assessed for unpaid source deductions required under the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act. The purpose of the proceedings following the interpleader order was to resolve the competing demands for the amounts paid into court. The corporation challenged the assessments in the Tax Court, but also challenged the amount of the cra’s claim within the interpleader proceedings. The Alberta Queen’s Bench found that it could determine the quantum of the cra’s claim as part of its jurisdiction in the interpleader proceedings and under the rules of the court governing payment out, and it reduced the cra’s claim to a portion of the assessment.88 The Alberta Court of Appeal overturned the decision of the Queen’s Bench, in essence finding that the decision to vary the quantum of the cra’s claim was an intrusion into the Tax Court’s exclusive jurisdiction to determine the validity of the assessment.89 The court went on to find that provincial superior courts could only determine matters that are ancillary to an assessment.90 As examples, the court suggested that a superior court could determine whether a third party was liable to pay a taxpayer, or whether a company had been revived and was thus subject to an income tax assessment. By this reasoning, a matter would be “ancillary to an assessment” if a court made a finding of fact for the purposes of resolving a non-tax issue that was within its jurisdiction, but that only incidentally affected the natural income tax outcome. The Alberta Court of Appeal’s reference to company revival proceedings fore- shadowed the precise issue before the British Columbia Supreme Court in 422252 Alberta Ltd. v. Canada (Attorney General).91 The cra had obtained restoration orders against two numbered bc companies in order to reinstitute collection proceedings with respect to its tax debts. The minister ultimately raised an assessment against a third company, the applicant, which had purportedly received a transfer from the two related numbered bc companies of certain shares for less than fair market value. The applicant was thus assessed in respect of that transfer under section 160 of the Income Tax Act. The taxpayer filed an application in the British Columbia Supreme Court for several declarations, including a declaration that the restoration order previously issued by that court did not have the effect of permitting the minister to assess the applicant. The applicant also had a concurrent appeal before the Tax Court of Canada.

88 [2001] 1 CTC 23 (Alta. QB). 89 The court considered, among other cases, Re Norris, [1989] 2 CTC 185 (Ont. CA), where the court found that a trustee in bankruptcy could challenge a CRA proof of claim only through the appeals process in the Income Tax Act. For a similar conclusion in the context of the Companies’ Creditors Arrangement Act (RSC 1985, c. C-36), see CCI Industries Ltd., Re, [2005] GSTC 144 (Alta. QB). 90 Aboriginal Federated Alliance Inc., supra note 87, at paragraph 18. 91 [2004] 1 CTC 73 (BCSC). 684 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

The British Columbia Supreme Court adopted the approach of the Alberta Court of Appeal regarding the test of “ancillary to an assessment,” distinguishing another case decided by the Alberta Court of Queen’s Bench.92 While referring to rectification cases as examples of matters that might be “ancillary” to the assessment, the court found, with respect to the taxpayer’s application, “Inherent in the declaration sought by the Petition here is a direct attack upon the Minister’s ability to reassess and not merely a matter ancillary to the consideration of the restoration orders.”93 Although using the phrase “direct attack,” the court seemed to conclude that indirect attacks on an assessment were equally offside by finding that the attack was “inherent in the declaration sought.” The decision also clarified that the form of relief sought was not itself a determining factor for the jurisdiction of the court. The applicant in 422252 Alberta Ltd. sought a declaration relating to the court’s own restoration order, relief that is likely prima facie within that court’s jurisdiction. However, the British Columbia Supreme Court looked beyond the form of relief sought and considered the underlying ration ale for the relief claim. Ultimately, the court found that characterizing the claim as an attack on the minister’s ability to raise the assessment in the context of the restoration order did not take the subject matter outside the exclusive jurisdiction of the Tax Court.94 As the Federal Court of Appeal had determined in Parsons, the minister’s legal authority to make assessments could not be distinguished from the issue of quantum and liability. These cases demonstrate that neither the general subject matter nor the specific form of relief sought is sufficient to establish the court’s jurisdiction. In both 422252 Alberta Ltd. and Aboriginal Federated Alliance Inc., the courts clearly had authority over the general subject matter (restoration of companies or priority disputes in interpleader proceedings) and the specific procedure, and could generally grant the form of relief sought. However, the courts nevertheless found that they had no jurisdiction to grant the relief because the substance of the relief sought in each case was dependent on an underlying challenge to the validity of the assessments.95 A similar

92 The applicant relied on Petromines Acquisitions Ltd. (Re), 2001 ABQB 568, among other decisions. In that case, the taxpayer applied to set aside the validity of a restoration order obtained by the CRA for the purposes of assessing the taxpayer. While dismissing the application, the Alberta Court of Queen’s Bench confirmed that it did have jurisdiction to determine whether the company was effectively revived. However, in recognizing the jurisprudence regarding the exclusivity of the Tax Court of Canada over the validity of the assessment, the court in Petromines carefully noted, ibid., at paragraph 9, “This Court is not addressing the assessment or reassessment of tax in this application. Those matters are within the exclusive jurisdiction of the Tax Court of Canada.” 93 422252 Alberta Ltd., supra note 91, at paragraph 38. 94 Ibid., at paragraphs 31 and 33. 95 The Tax Court ultimately did consider the assessment issue that arose in Aboriginal Federated Alliance Inc., supra note 87: see Aboriginal Federated Alliance Inc. v. The Queen, 2004 DTC 2701, at paragraphs 4-6 (TCC). In his decision, O’Connor J of the Tax Court acknowledged the judgment of the Alberta Court of Appeal. the jurisdictions of the tax court of canada and other superior courts n 685 result arose in the case of an action for unjust enrichment where the Ontario Court of Appeal found that the appeal provisions relating to an alleged overpayment of withholding tax under part xiii of the Income Tax Act constituted “a complete procedural code for the return of non-resident withholding taxes.”96 An approach similar to that in 422252 Alberta Ltd. and Aboriginal Federated Alliance Inc. has also been applied in the context of proceedings under the Companies’ Creditors Arrangement Act.97 That statute generally affords a superior court with a broad and flexible supervisory jurisdiction. The recognition of the principle in such proceedings therefore serves to reinforce the idea that the concept of “ancillary to the assessment” is to be narrowly defined.

Provincial Superior Courts Decline Jurisdiction Provincial superior courts have occasionally addressed a jurisdictional issue by deciding to decline jurisdiction.98 The general rationale for declining jurisdiction is to defer to the court with expertise in the specialized field for which the court was designed,99 or to a court that is a more effective and appropriate forum.100 In a few cases, provincial courts have relied on the ability to decline jurisdiction as an alternative basis for dismissing an application where the court’s jurisdiction has been challenged.101 The decision of the Ontario Superior Court of Justice in glp nt Corporation v. ag of Canada102 illustrates the rationale for declining jurisdiction. In that case, while filing an appeal to the Tax Court, the taxpayer also filed an application to the Ontario Superior Court of Justice for declarations that the taxpayer was an “open-end mutual fund” as defined by section 24(11) of the Ontario Business Corporations Act, and with respect to the status of certain shares. In effect, establishing itself as a “mutual fund corporation” under the Income Tax Act could exclude the taxpayer from the application of part vi.1 of the Act, which otherwise imposed a special tax on certain dividends paid by the corporation. The taxpayer also sought declarations relating to

96 Sentinel Hill No. 29 Limited Partnership v. Canada (Attorney General), 2008 ONCA 132, at paragraph 14. 97 CCI Industries Ltd., supra note 89; and Mine Jeffrey inc. (Arrangement relative à), 2006 QCCS 5695. 98 See Jabs Construction, infra note 115; 422252 Alberta Ltd., supra note 91; and also GLP NT Corporation, infra note 102. In Ho-A-Shoo, supra note 82, at paragraph 50, the Ontario court refused to decline jurisdiction, although it had already determined that the Tax Court did not have the jurisdiction to determine the issue of unassessed interest charged to the recipient of a transfer in respect of a section 160 assessment. 99 Cook v. Canada (Attorney General), 1998 CanLII 13469, at paragraphs 12-13 (Sask. QB). 100 Ho-A-Shoo, supra note 82, at paragraph 49. The attorney general in that case argued that it was appropriate to “facilitate the development of a consistent, comprehensive, national body of tax law”: ibid., at paragraph 48. See also Longley, supra note 74, at paragraph 26, the dissenting judgment of Southin JA. 101 See Jabs Construction, infra note 115; and 422252 Alberta Ltd., supra note 91. 102 2003 DTC 5654. 686 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 the effect of certain resolutions, and the status of certain shares. All of the relief sought appeared to be directed at obtaining findings for the sole purpose of affecting the tax outcome. In dismissing the taxpayer’s application and deferring to the proceedings already commenced in the Tax Court, the Ontario Superior Court of Justice acknowledged that its jurisdiction would not extend to all of the matters in dispute, and that the tax appeal would have to proceed in the Tax Court in any event. The court identified two general reasons for declining jurisdiction: first, respect for the laws of Canada; and second, recognition of the Tax Court’s expertise in tax-related matters. The former represented the principle that “a court should not issue a declaratory order that would interfere with the jurisdiction assigned to a specialized tribunal, even if it has the power to do so.”103 The court acknowledged the decision in Roper,104 where the Tax Court held that it has jurisdiction to make determinations on non-tax issues incidental to the appeal that arise in the course of consideration of the validity of the tax reassessments only if the superior court with competent jurisdiction has not already decided the issue. While this aspect of the decision was an obiter dictum,105 situations such as the one in glp nt Corporation can raise the question of the extent to which a superior court can bind the Tax Court on an issue affecting a tax assessment. For that reason, I deal next with jurisprudence concerning rectification applications and suggest that such decisions, while conceptually creating a narrow exception to the divisional line of jurisdiction, apply only in cases where a superior court can and does grant a rectification order as relief.

Rectification Cases—Equity Finds a Backdoor in Tax Cases? As suggested in the preceding section of this article, the determination of what is, and what is not, an issue that is ancillary to the assessment is not always crystal clear. However, the question of the dividing line between the jurisdiction of the Tax Court and that of other superior courts has been made even more complicated by the line of tax cases involving rectification, starting with the decision of the Federal Court of Appeal in Dale et al. v. The Queen.106 Ultimately, this line of cases has led to what is arguably an indirect exception to the jurisdictional dividing line. Where rectification is available, a provincial superior court can permit a taxpayer to “correct” a mistake in the way that a transaction was reduced to writing in a document, thus affecting the tax implications of a transaction. However, rectification is, unless otherwise provided for in a statute, an equitable remedy. Since the Tax Court of Canada has no jurisdiction in equity and cannot grant a remedy based only on

103 Ibid., at paragraph 21. 104 Supra note 76. 105 The matter was not put in issue, since the parties appeared to agree that the effect of the declaration in the circumstances would bind the minister. See GLP NT Corporation, supra note 102, at paragraphs 13-14. 106 97 DTC 5252 (FCA). the jurisdictions of the tax court of canada and other superior courts n 687 equitable principles,107 it cannot grant an order of rectification.108 Despite this constraint, the ability of the provincial superior courts to grant rectification in order to reverse tax consequences in certain cases has arguably given equitable principles a theoretical backdoor into the Tax Court’s jurisdiction over tax cases. In considering this issue, it is important to separate rectification cases from cases involving other jurisdictional issues. While rectification cases may create an indirect exception to the Tax Court’s exclusive jurisdiction, they do not give provincial courts any inroads into the Tax Court’s exclusive jurisdiction in any other circumstances. A brief review of the relevant case law will serve to illustrate this point. In Dale, the court had to decide whether the minister, in assessing the taxpayers, could disregard a transaction that was the subject of a rectification order issued by the Nova Scotia Supreme Court.109 The taxpayers were a father and son who had decided to sell their building in Nova Scotia. They owned a majority of the issued shares of a Prince Edward Island company. In order to prevent the realization of a capital gain and recapture of capital cost allowance on the sale of the building, they attempted to transfer the property to the pei company (which could offset the capital gains and recapture) in exchange for preference shares, thus qualifying for a rollover under section 85 of the Income Tax Act. The PEI company omitted to formalize the steps necessary to increase its authorized capital to permit issuance of the preference shares. When the omission was discovered by the company three years later, it issued several resolutions ratifying the earlier actions. It also sought retroactive orders under the Nova Scotia Companies Act, including an order rectifying the share register by declaring its authorized share capital to have been amended retroactive to the time of the transfer. The Nova Scotia Supreme Court granted the orders for rectification. The minister assessed the taxpayers on the basis that certain preferred shares had never been validly issued, owing to the failure to formalize an increase in the authorized capital, and thus the section 85 rollover was invalid. In the subsequent tax appeal proceedings, the Crown asserted that the order of the Nova Scotia court could not bind the minister. The majority decision in the Federal Court of Appeal, delivered by Robertson ja, found that the order of the Nova Scotia Supreme Court was immune from jurisdictional collateral attack and thus bound the minister with respect to the tax implications. In dissent, Pratte ja (who had con- curred with the reasons in the Brydges decision)110 found that the judgment of the Nova Scotia Supreme Court was made on an ex parte basis on evidence of facts that had occurred long after the end of the taxation year. He consequently found that the

107 Chaya v. The Queen, 2004 DTC 6676 (FCA); and Hamilton, supra note 11. 108 See also GLP NT Corporation, supra note 102, at paragraph 16; and Stern v. The Queen, 2004 DTC 3260, at paragraph 30 (TCC) (though neither decision specifically references a lack of jurisdiction in equity). 109 The orders were based on a provision in the provincial legislation and not a general equitable remedy. 110 Supra note 50 (FCA, per Hugessen JA) and note 51 (FCTD, reasons delivered by McNair J). 688 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 orders could not affect the validity of the assessment made by the minister. It appears that perhaps Pratte ja would also not accept that the Nova Scotia Supreme Court could retroactively alter the tax outcome to the company. The majority of the Federal Court of Appeal did not agree, finding that the orders issued by the Nova Scotia Supreme Court could in fact bind the minister with respect to the tax outcome. The majority view seemed to be influenced by the fact that the order rectifying the share register was specifically provided for in section 44 of the Nova Scotia Companies Act. Thus, while the Dale case involved a statutory remedy as distinct from an equitable remedy, it made some room for provincial courts to exercise influence over tax outcomes. Robertson ja also noted that generally a court “would decline the invitation to grant a retroactive order which has the clear legal effect of rewriting fiscal history.”111 He went on to say:

Assuming that such an order were granted then it would be proper to ask whether the Minister is entitled to ignore it for taxation purposes. One might be tempted to permit an attack on the ground of fiscal revisionism where it could be shown that the order was obtained by non-disclosure or misrepresentation. More likely than not revisionist orders will be obtained on consent, or in circumstances where it is likely that the tax ramifications of the order were not placed squarely before the judge, or where the judge was obviously sympathetic to the taxpayer’s situation.112

It was not long before the Ontario Court of Appeal had occasion to test the limits of “rewriting fiscal history.” In ag of Canada v. Juliar et al.,113 the court considered an application for a rectification order where only the tax implications were at issue, and were placed squarely before the court. A husband and wife wanted to turn their business over to their two daughters and their respective husbands. Eventually, they decided to divide the business, which involved several stores, in order to allow each couple to operate independently of one another. Through their accountants, the family arranged their affairs so as to fall within the rollover provisions of section 85 of the Income Tax Act, with the intention of deferring any tax implications from the transaction. However, the advisers for one of the couples were misinformed that tax had already been paid by the father and mother. This erroneous information caused them to advise the couple to use promissory notes in their transactions with the holding company set up for the sale, rather than a share-for-share exchange. This decision placed the transaction outside the scope of section 85. The couple sought an order to permit rectification to affect the transactions whereby they had acquired a half-interest in the business, by essentially substituting a share-for-share exchange that would not attract immediate tax liability.

111 Dale, supra note 106, at 5256. See also Sussex Square Apartments Limited v. The Queen, 99 DTC 443, at paragraphs 40 and 42 (TCC); aff ’d. 2000 DTC 6548 (FCA). 112 Dale, supra note 106, at 5256. 113 2000 DTC 6589 (Ont. CA). the jurisdictions of the tax court of canada and other superior courts n 689

In upholding the decision of the trial judge, the Ontario Court of Appeal agreed that rectification was appropriate, even though the only purpose of the rectification order was to reverse the step that had led directly to the imposition of income tax. The Juliar decision thus constitutes an interesting comparison with the decision of the Federal Court of Appeal in Brydges. In Brydges, the Court of Appeal had determined that the subject matter fell within the jurisdiction of the Tax Court because the certification of short productions had no other purpose or effect outside the scheme of the Income Tax Act. One could make the same argument with respect to the application for rectification in the Juliar decision. The obvious distinguishing aspect is that in the Brydges decision, the certification by the minister of communications was specifically contemplated under the Income Tax Regulations, and thus distinct from the equitable remedy of rectification.114 Nevertheless, it appears that in the Juliar case, the Ontario Court of Appeal asserted jurisdiction over the matter even though the application had no purpose other than to affect the tax liability of the taxpayers, thus (at least arguably) “rewriting fiscal history.” This “exception” created by the rectification jurisprudence is itself a fine line. This point is illustrated by a comparison of the Juliar case with cases where taxpayers have sought a declaration that does not involve rectification. In Felsen Foundation v. Jabs Construction Ltd. et al.,115 which was not a rectification case, the taxpayer seemed to push the limits of jurisdiction with the momentum of the Dale decision. In Jabs Construction, a charitable foundation made an application to the British Co- lumbia Supreme Court for a declaration that a gift from a benefactor was legally valid. The CRA had assessed the “donor” on the basis that the transfer of revenue properties was not a gift pursuant to subsection 110.1(3) of the Income Tax Act. The court dismissed the application on the basis that it did not have jurisdiction, and alternatively, that it should in any event decline jurisdiction. In so finding, the judge determined that the matter was one to be put before the Tax Court of Canada, and that the petitioner was not entitled to an opinion of the court under the guise of a declaratory order. The court stated that it was not in the business of deciding issues solely to instruct other courts.116 The scenario in Jabs Construction is, in a very broad sense, similar in effect to that in Juliar. However, the Juliar case involved a request for rectification that asked the court to approve of certain specific steps retroactively. In Jabs Construction, rectification was not sought, and indeed could not be. The petitioner in that case did not ask the court to approve the correction of any documents at issue, but rather sought an opinion as to the characterization of the transaction. The jurisprudence thus suggests that superior courts can issue relief that is directed at changing a tax outcome only

114 Another distinction is that in Juliar, the taxpayer based the decision to execute a document on erroneous information. And, of course, the court found that all of the elements of rectification had been met. 115 98 DTC 6454 (BCSC). 116 Ibid., at paragraph 7. 690 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 in very narrow circumstances. In other words, where rectification is not available, as was the case in Jabs Construction, the jurisprudence in rectification cases does not in any way substantiate provincial superior court jurisdiction to issue any other form of declaration or relief for the purpose of affecting a particular tax outcome. One could have a theoretical debate as to whether or not the examples of rectification orders that are directed at undoing tax consequences have stepped over the boundaries of jurisdiction, particularly if one compares them with results in cases such as Jabs Construction or glp nt Corporation. The reasoning of Robertson ja in the Dale decision, that courts “would decline the invitation to grant a retroactive order which has the clear legal effect of rewriting fiscal history,” provides another interesting contrast. If the tax outcome is the only purpose for a rectification order, the Supreme Court of Canada’s conclusion in its 1970 decision in J.B. & Sons Co. Ltd., that the principle of judicial comity toward courts of coordinate jurisdiction did not apply, might suggest that the Tax Court would not be bound by a rectification order.117 Nevertheless, rectification in tax cases appears to be a practice accepted by the courts in very narrow circumstances, and could be said to be an exception to the rule restricting a provincial court’s jurisdiction over matters “ancillary” to the assessment. It might also be argued that rectification orders properly fall into the category of matters “ancillary” to the assessment, though this is subject to debate if the only purpose and effect of the proceedings is to alter the tax implications. Given the reality of the availability of rectification orders in tax cases, the comments of the majority in Dale regarding “revisionist orders” provide some guidance in situations where a rectification order is sought without notice to the minister of national revenue.118 Inasmuch as the order arguably represents an indirect intrusion into the Tax Court’s territory, it would seem imprudent for the taxpayer to seek a rectification order without serving the minister, because the possibility that the order may be found not to bind the Tax Court would then be much greater. Indeed, at least two provincial superior courts have already indicated that the minister must be served in these circumstances.119

117 Admittedly a key difference is that a rectification order is more indirect, since it addresses a factual occurrence rather than the legal consequence, even though the tax consequence may logically flow from that factual occurrence. In J.B. & Sons Co. Ltd., supra note 22, the Supreme Court was addressing a finding of the superior court that purported to determine the direct legal consequence—that is, which party had the liability for the tax. 118 See Columbia North Realty Company, Re, 2006 DTC 6124 (NSSC). 119 Ibid.; and Snow White Productions Inc. v. PMP Entertainment, [2004] 3 CTC 282 (BCSC). It would be difficult to reconcile a taxpayer position that the minister has no interest in a hearing for a rectification order with the proposition that the same taxpayer would undoubtedly raise later in the Tax Court—that the rectification order would bind the minister as per the Dale decision. In this regard, one might take note of the reasoning of Pigeon J in J.B. & Sons Co. Ltd., supra note 22, at 234. Contra, see Canada (Procureur Général) v. Gestion R.F. & Fils Inc., 2002 CanLII 14468 (Que. CS). the jurisdictions of the tax court of canada and other superior courts n 691

Irrespective of the issue of notice to the minister, the jurisprudence in rectification cases must be put in its proper context. As stated above, rectification cases do not in any way substantiate superior court jurisdiction to issue any other form of declaration or relief that is specifically directed at affecting a tax outcome. Jurispru- dence in rectification cases therefore should apply only to other rectification cases. It should not be invoked in cases where the rectification remedy is not available, and where the party merely seeks a declaration that purports to affect the tax implications of a transaction.

Abuse-of-Process c A ses The judicial discourse on the parameters of the Tax Court’s exclusive jurisdiction has most recently been focused on the issue of abuse of process—cases where the taxpayer seeks a remedy in respect of the cra’s actions in raising an assessment. This issue has arisen in several contexts:

1. A taxpayer files an appeal in the Tax Court, claiming that the cra and its officers abused their powers in the process of raising an assessment, or in reviewing the assessment at the objection stage, and seeking an order setting aside the assessment. 2. A taxpayer seeks judicial review of the decision to assess in the Federal Court pursuant to section 18.1 of the Federal Courts Act on an issue of process. 3. A taxpayer files a statement of claim in the Federal Court or a provincial superior court claiming damages or injunctive relief against the minister on the basis of an abuse of power or process120 during the audit or objection stage.

In the last four or five years, there has been a spate of decisions in a variety of courts that address the jurisdiction of each court to grant relief in these circumstances. In addressing this line of cases, a few important points must be made at the outset. The Tax Court clearly has no ability to grant damages as a form of relief. On the other hand, no superior court other than the Tax Court has the ability to effectively set aside a tax assessment.121 However, the cases tend to address the issue in more subtle circumstances. In certain cases, a taxpayer might launch a statement of

120 This, of course, might also include all of the related causes of action such as misfeasance of office or negligence. 121 In Redeemer Foundation v. MNR, 2005 DTC 5617 (FC), the Federal Court granted an order requiring the minister to vacate assessments that were founded on certain information that the court found was obtained by unlawful means, after determining that certain information obtained by virtue of statutory authority was improperly used. The decision was overturned by the Federal Court of Appeal on the main issue of the legality of the information request (2006 DTC 6712 (FCA)); leave to appeal was granted by the Supreme Court of Canada. Both the majority and the dissenting reasons confirmed that the Federal Court did not have the jurisdiction to order the minister of national revenue to vacate the assessments: Redeemer Foundation v. Canada (National Revenue), 2008 SCC 46, at paragraphs 28 and 58. 692 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 claim for damages for “abuse of power” where the basis for the cause of action is an “unlawful” assessment.122 In other cases, a taxpayer might appeal an assessment and raise allegations regarding the process in a notice of appeal. Sometimes a taxpayer initiates proceedings in both the Tax Court and the superior court.

The Tax Court on Abuse of Process The Tax Court of Canada was confronted with dual proceedings related to abuse of power in Obonsawin v. The Queen.123 The taxpayer had commenced two proceedings: an appeal from the gst assessment in the Tax Court and a tort action for damages in the Ontario Superior Court of Justice.124 The taxpayer seemed to focus on abuse-of- process issues and alleged, among other things, that the gst assessment was issued in breach of a test-case agreement with the minister. The remedies sought in the action before the Ontario court included an interim and permanent injunction enjoining the minister from breaching a test-case agreement, and a mandatory injunction requiring the minister to honour or perform the test-case agreement. The taxpayer then made an application to the Tax Court to stay the tax appeal proceedings, arguing that the action in the Ontario court would be prejudiced if the Tax Court confirmed the assessment, thus permitting collection action. The application to stay the Tax Court proceedings was dismissed by Miller j. The court confirmed that it alone had jurisdiction to vacate a gst assessment, and the Ontario court alone had jurisdiction to award damages in a tort action. The court also recognized the jurisprudence supporting its finding that the Tax Court had no authority to hear representations with respect to an abuse-of-process argument or to provide any remedy.125 The court noted, however, that the Federal Court of Appeal had appeared to leave the issue somewhat open in Dwyer v. The Queen,126 and expressed the hope that the Federal Court of Appeal might in the future hear a full debate on the court’s jurisdiction.127 The court further noted that any issue

122 See, for example, The Queen v. Roitman, 2006 DTC 6514 (FCA); leave to appeal refused [2006] SCCA no. 353. This case is discussed in detail below at note 174 and the accompanying text. 123 2004 GTC 131 (TCC). 124 See Obonsawin v. Canada (Minister of National Revenue), 2006 CanLII 32636 (Ont. SCJ). The court dismissed the Crown’s application to strike the statement of claim on the basis of jurisdiction. The decision was overturned by the Ontario Court of Appeal in Obonsawin (Native Leasing Services) v. Canada (National Revenue), 2007 ONCA 701, in November 2007, but on the narrower issue of the sufficiency of the pleadings. 125 For cases involving abuse of process or similar “process” issues, see, for example, AG of Canada v. Webster, 2003 DTC 5701 (FCA); Milliron v. The Queen, 2003 DTC 5490 (FCA); and Sinclair v. The Queen, 2003 DTC 5624 (FCA). For more recent cases applying similar principles after the Obonsawin decision, see Lassonde v. The Queen, 2006 DTC 6039 (FCA); leave to appeal refused (2007), 354 NR 398 (note); Hardtke v. The Queen, 2005 DTC 676 (TCC); and Burrows v. The Queen, 2006 DTC 2172 (TCC). 126 2003 DTC 5575 (FCA). 127 Obonsawin, supra note 123, at paragraph 13. the jurisdictions of the tax court of canada and other superior courts n 693 arising from collection action after the Tax Court decision might be addressed in the Federal Court. 128 The court concluded that because the issue before the Tax Court was confined to the quantum of the assessment, there was no prejudice to the taxpayer in allowing the Tax Court proceedings to continue. Miller j also concluded that in the circumstances, there was “no overlap of jurisdiction between the Tax Court of Canada and the [Ontario Superior Court of Justice]: the issues are separate and distinct in the two Courts.”129 The Tax Court’s decision in Obonsawin does not suggest that if a statement of claim seeks damages as relief, a superior court would automatically have jurisdiction to award that relief, simply because the Tax Court could not. Clearly, the Tax Court has no ability to issue that form of relief. However, one can envisage a situation in which a taxpayer launches a statement of claim for damages for “abuse of power” where the cause of action relates to an allegation that an assessment claimed is unlawful, and the taxpayer seeks a damage award that includes the amount of the assessment.130 Given those circumstances, a superior court could not award damages on the premise that the assessment was indeed wrong or that the minister had no ability to make that assessment.131 In Obonsawin, Miller j refrained from commenting on the jurisdiction of the Ontario court to issue a declaration relating to the validity of the gst assessment, but noted that such an order would not mean that the Tax Court would automatically implement any such decision by vacating the assessment.132 The reference to the Court of Appeal’s decision in Dwyer, however, cast some doubt on the limits of the Tax Court’s jurisdiction. In Dwyer, the Federal Court of Appeal considered whether the Tax Court judge erred in failing to find that the conduct of an auditor constituted an abuse of process. Notably, the court did not address the issue of the Tax Court’s lack of jurisdiction to entertain this argument, but simply disposed of the issue on its merits.133 The reasons of Miller j in Obonsawin suggested a concern that this could be interpreted as a tacit acknowledgment of the Tax Court’s jurisdiction. The Court of Appeal may have merely felt that it was more efficient to comment on the lack of merit of the claim; indeed, it later noted that the allegation of abuse in Dwyer was one of several issues raised in relation to multiple assessments.134 However, the situation demonstrates the confusion that can arise in relation to the issue of jurisdiction.

128 Ibid., at paragraph 15. 129 Ibid., at paragraph 17. The taxpayer appealed the Tax Court’s decision but the appeal was discontinued: Obonsawin v. Canada, 2006 FCA 5. 130 See, for example, Roitman, supra note 122. 131 The jurisprudence has suggested that an argument that the minister had no ability to make an assessment is the same thing as challenging the correctness of the assessment. See Parsons, supra note 25, at 6346; and 422252 Alberta Ltd., supra note 91, at paragraphs 27-28. 132 Obonsawin, supra note 123, at paragraph 15. 133 See supra note 126. 134 See Main Rehabilitation Co. Ltd., infra note 135. 694 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

The Federal Court of Appeal Clarifies the Line The Federal Court of Appeal soon had a chance to clarify its decision in Dwyer in Main Rehabilitation Co. Ltd. v. The Queen.135 The Crown applied to strike portions of the tax appeal that alleged that the audit itself was an abuse of process. The claim included an allegation that the auditor’s supervisor was a friend of a disgruntled shareholder of the company, who had allegedly triggered the audit by a false tip. In reviewing the trial judge’s decision to strike those portions dealing with the allegations of abuse of process, the Court of Appeal concluded that it was plain and obvious that the Tax Court did not have the jurisdiction to set aside an assessment on the basis of an abuse of process. In so finding, the court outlined where the jurisdictional dividing line lay. The court clearly set out that the validity of the assessment, or whether the amounts assessed can be shown to be properly owing, are matters for the Tax Court. Conversely, the process by which the assessment is established, or whether or not the officials exercised their powers properly, were matters lying outside the Tax Court’s jurisdiction.136 In support of this proposition, the Federal Court of Appeal cited its own decisions in The Queen v. The Consumers’ Gas Company Ltd.,137 Ludco Enterprises Ltd. v. The Queen,138 and Sinclair v. The Queen.139 The court also confirmed that its previous decision in Dwyer did not constitute a departure from the existing state of the law.140 Although Main Rehabilitation Co. Ltd. originated in the Tax Court, the Federal Court of Appeal had clearly identified the dividing line of jurisdiction by reference to the jurisdiction of other superior courts in abuse-of-process cases. Nevertheless, the potential for misunderstanding arose from a subsequent decision of the Federal Court of Appeal. In Swift v. The Queen,141 the taxpayer filed a statement of claim in the Federal Court alleging abuse of process. While the decision does not add much to the development of the law, it is a recent case that illustrates the potential for misinterpretation on the issue of jurisdiction. In Swift, the Federal Court struck the statement of claim filed by a taxpayer who made allegations of fraud by the representatives of the minister, including an allegation of fraudulent assessment. The facts of the case may, on their face, have appeared sympathetic to the taxpayer. Shortly after being assessed, the taxpayer made an as- signment into bankruptcy. Although he had filed a notice of appeal in the Tax Court,

135 Main Rehabilitation Co. Ltd. v. The Queen, 2004 DTC 6763, at paragraph 14 (FCA); leave to appeal dismissed [2005] SCCA no. 37. 136 Ibid., at paragraph 8. For more recent cases where the Tax Court struck portions of an appeal relating to abuse-of-process issues, see Faber v. The Queen, 2007 DTC 640 (TCC); and Luciano v. The Queen, 2007 DTC 706 (TCC). 137 87 DTC 5008 (FCA). 138 [1996] 3 CTC 74, at 84 (FCA). 139 Supra note 125. The Sinclair case dealt with a Charter issue. 140 Main Rehabilitation Co. Ltd., supra note 135, at paragraph 14. 141 2004 DTC 6651 (FCA). the jurisdictions of the tax court of canada and other superior courts n 695 authority over that litigation officially devolved to the trustee in bankruptcy, who shortly thereafter discontinued the appeal. The taxpayer then filed a statement of claim in the Federal Court. In striking the claim, the trial judge noted that the court had no jurisdiction to entertain challenges to an assessment of tax liability.142 The court also noted that given the matters addressed in the statement of claim, the plaintiff was attempting to relitigate matters decided by the Tax Court, seemingly suggesting the application of res judicata or issue estoppel. Last, the court found that the allegations lacked any factual basis and thus struck the statement of claim as frivolous and vexatious. The Court of Appeal overturned the lower court’s decision to strike out the claim, allowing the appeal. The reasons of the court included the following findings:

The claim being advanced by the Appellant, although it labels the assessments as fraudulent, does not seek to set aside the assessments. In essence, it is a claim for damages for fraudulent actions on the part of officials of the ccra [the CRA] during the assessment process. This claim for damages has not been previously decided by the Tax Court of Canada and is not within the jurisdiction of the Tax Court of Canada. All that happened in the Tax Court of Canada was that the Appellant’s appeal of his tax assessments was withdrawn.143

The decision of the Court of Appeal might be misinterpreted in a few respects. The fact that the statement of claim sought damages and did not seek to specifically set aside the assessments would not itself be determinative of the matter. A taxpayer cannot, of course, obtain an order to set aside assessments because, pursuant to subsection 152(8) of the Income Tax Act, they are deemed to be valid and binding until varied, and because the Tax Court of Canada has exclusive jurisdiction over such matters. However, it is equally problematic for the taxpayer to seek damages based on an “unlawful” or “fraudulent” assessment. Such a claim necessarily asks the court to assume or conclude that the assessment was wrong in law and thus is not valid and binding. Further, the fact that the Tax Court of Canada had not previously decided the matter would not, in and of itself, confer jurisdiction on the Federal Court.144 If the matter was truly one of abuse of process, it would not fall within the Tax Court’s jurisdiction. Any Tax Court decision in a tax appeal normally ought not to give rise to the principle of res judicata or issue estoppel with respect to a truly distinct matter of abuse of process.145

142 [2004] GSTC 124 (FC). 143 Supra note 141, at paragraph 8. 144 See Roitman, supra note 122, at paragraph 26. 145 See, for example, Donald J. Lange, The Doctrine of Res Judicata in Canada, 2d ed. (Markham, ON: LexisNexis Butterworths, 2004), 100-3. See also the commentary of David Sherman found at [2004] GSTC 125, at 125-3, which also mentions other considerations regarding the lower court’s decision. For example, the trial judge found that there was no factual basis for any of the allegations made in the claim. However, it is not for the plaintiff to bring any evidence on a motion to strike or prior to the trial of the action. 696 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

In the circumstances, a narrow interpretation of the decision in Swift is therefore warranted. The court ultimately found that the statement of claim was a “rambling discourse related to the actions taken by ccra, and is lacking in detail as to the allegations of fraud.”146 The court also recognized that the taxpayer’s allegations of fraud lacked some detail, possibly as a result of the fact that he was unrepresented. The court was likely unable to decipher whether the allegations of “fraudulent” assessment related only to the substance as opposed to the process of the assessment. In that sense, it was fair to conclude that on the basis of the allegations in the “rambling” statement of claim, it was not plain and obvious that the action could not succeed (the proper threshold for this application). By this interpretation, the case has very limited application, as was later confirmed by the Federal Court of Ap- peal.147 In most cases, it will be plain and obvious whether the substance of the claim falls within the jurisdiction of the Federal Court or whether it is simply a challenge to the underlying assessment in disguise. This explanation of the Court of Appeal’s decision in Swift is supported by reference to its subsequent decision in Sokolowska v. The Queen.148 In that case, the appellant was a mother who held power of attorney for her daughter and was also the admin- istrator of her deceased husband’s estate. Her husband had died with an income tax debt, most of which arose in or prior to 1992. In December 1992, he had transferred to his daughter real property valued at over $100,000, for the sum of $1. Consequently, the cra assessed the daughter pursuant to section 160 of the Income Tax Act. The daughter later successfully appealed a portion of the assessments against her, establishing her entitlement to certain allowable business investment losses. Her further appeal to the Court of Appeal contesting the remainder of the assessment was dismissed. The mother later filed an action in the Federal Court, alleging that the daughter had been improperly assessed pursuant to section 160, while also challenging requirements to pay issued by the cra to the daughter’s financial institution to collect the resulting debt. In addition, the mother made allegations of fraud against the cra, claiming that certain business investment losses had been improperly denied. The statement of claim was dismissed primarily on the basis that the Federal Court did not have jurisdiction.149 The court also noted that many of the issues raised in the statement of claim had already been addressed in the previous decision by the Tax Court.150

146 Swift, supra note 141, at paragraph 9. 147 Indeed, this seems to be how the Court of Appeal explained the outcome in the Swift case in its subsequent decision in Roitman, supra note 122, at paragraph 27. 148 2005 DTC 5089 (FCA); leave to appeal refused (2006), 346 NR 195 (note). 149 Sokolowska v. The Queen, 2003 CarswellNat. 5158 (FC). 150 Ibid., at paragraph 5. the jurisdictions of the tax court of canada and other superior courts n 697

The Federal Court of Appeal dismissed the appeal. In so doing, the court found that the motions judge had correctly applied the decision in Optical Recording,151 finding that the Federal Court had no jurisdiction with respect to proceedings arising out of the assessment. The Federal Court of Appeal also referred approvingly to the lower court’s finding that the matters had already been raised in the Tax Court. While the lower court’s reference to the previous decision of the Tax Court is un- derstandable, once again, it ought not to be misconstrued. Had the Tax Court not determined matters related directly to the tax appeal, that fact alone would certainly not have provided the Federal Court with any kind of residual jurisdiction.152 The fact that another court did or did not purport to consider the issue is of no consequence if it did not have jurisdiction over the subject matter in the first place. Conversely, if the Tax Court had purported to determine an issue without having jurisdiction to determine it, the principle of res judicata would not apply.153 Therefore, the lower court’s reference to the previous decision of the Tax Court does not provide any reason for distinguishing the Sokolowska decision in future cases where the substance of the taxpayer’s appeal has not been determined by the Tax Court. Indeed, it is nota- ble that the Federal Court of Appeal did not emphasize the issue of res judicata in dismissing the appeal, and referred primarily to the Federal Court’s finding that it had no jurisdiction.154

Recent Judicial Review Decisions The issue of jurisdiction has been further clarified by a recent series of judicial review cases in the Federal Court. Before I address this line of cases, a brief reminder of the federal court structure is required. Section 18.1 of the Federal Courts Act provides the Federal Court with exclusive jurisdiction over judicial review of the decisions of federal tribunals. A notice of reassessment is in effect an administrative act of a government official that falls within the parameters of section 18.1, and would normally be subject to judicial review proceedings based on section 18.1 alone. However, by the operation of section 18.5, a taxpayer cannot rely on section 18.1 to challenge an assessment by the minister of national revenue, because the only recourse is to appeal the assessment in the Tax Court of Canada, whether the taxpayer seeks to challenge the assessment as an end in itself or for some other purpose.155 In effect, the appeal to the Tax Court precludes

151 Supra note 34. 152 For similar logic, see Roitman, supra note 122, at paragraph 26, where the court determined that the failure of the taxpayer to pursue an appeal before the Tax Court cannot mean that the Federal Court would inherit jurisdiction over the matter. 153 See, for example, Lange, supra note 145, at 100-3. 154 Supra note 148, at paragraph 16. 155 Webster, supra note 125, at paragraphs 20-21; Greene, supra note 49, at paragraph 9; and Walker, supra note 66, at paragraph 13. 698 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 judicial review of an assessment under section 18.1.156 Instead, it gives the taxpayer a full trial de novo, where, as suggested in the Johnston case,157 the Tax Court considers the evidence presented to it. Consequently, non-tax cases that define the relationship between the right to judicial review and the right to initiate an action in relation to government decisions are, by analogy, instructive to tax cases. The Federal Court does not have jurisdiction to award damages or to grant any other relief that is sought on the basis of an invalid reassessment of tax where the reassessment has not been overturned by the Tax Court. To do so would be to permit a collateral attack on the correctness of an assessment, which is strictly prohibited by the legislative scheme of the Income Tax Act and the Federal Courts Act.158 The decision of the Federal Court of Appeal in ag of Canada v. Webster159 confirmed this principle in rather interesting circumstances. During the course of appeal proceedings in the Tax Court, the taxpayer sought an unredacted version of an audit report that included the information from a third-party informant.160 The application to compel disclosure was rejected by the Tax Court. In the course of discovery, the taxpayer later learned that the appeals officer hearing the objection had purportedly been provided with an unredacted version of the audit report. Consequently, the taxpayer made an application for judicial review seeking an order confirming a breach of his rights and quashing the assessment. While the court confirmed that the jurisdiction of the Tax Court was limited to determining whether the assessments were correct in law, it also determined that the Federal Court had no jurisdiction to review the objection process, even if there were flaws in that process.161 For the reasons suggested above, case law regarding the parameters of section 18.5 of the Federal Courts Act in non-tax cases can be just as informative in assessing the

156 Except for administrative decisions where an appeal is not available, with certain exceptions. See Addison & Leyen Ltd., infra note 180 and the accompanying text. 157 Supra note 14. 158 Parsons, supra note 25, at 6346; Khan v. MNR, 85 DTC 5140 (FCA); Optical Recording Corp., supra note 34, at 320-21; and Bechthold Resources Limited, supra note 26, at 6067. In Albion Transportation Research Corp., supra note 47, the court applied section 18.5 of the Federal Court Act to an action, as distinct from an application for judicial review. Significantly, the court found that the words “otherwise dealt with” in section 18.5 meant that even an action for damages or for a declaration would be precluded by section 18.5 if it entailed an attack on the validity of the tax assessment. See also Obonsawin, supra note 123. 159 Webster, supra note 125. 160 Ibid., at paragraph 11. 161 Ibid., at paragraphs 20-21. The court also noted that the mandate of the Tax Court itself was only to determine whether the assessment was correct in law, irrespective of any unfairness or flaw in the objection process. For other recent judicial review decisions addressing the limitations of the jurisdiction of the Federal Court, see Walsh et al. v. MNR et al., 2006 DTC 6066 (FC); aff ’d. 2007 DTC 5512 (FCA); Heckendorn v. The Queen et al., 2005 DTC 5310 (FC); and Angell et al. v. MNR et al., 2006 DTC 6525 (FC). the jurisdictions of the tax court of canada and other superior courts n 699 ability to bring an action for damages in tax cases. In Canada v. Grenier,162 an inmate brought an action against the Crown claiming damages in respect of a decision by the head of a correctional institution to remove the inmate to administrative segre- gation. The Court of Appeal followed its earlier decision in Tremblay v. The Queen163 in determining that a person seeking to challenge a decision of a federal agency cannot decide to launch an action instead of a judicial review of the decision, but rather “must proceed by judicial review in order to have the decision invalidated.”164 As suggested by the Supreme Court of Canada in Vaughan v. Canada, a plaintiff cannot frame an action in negligence to circumvent the application of a statute.165 In a tax case, this would translate to filing an appeal in the Tax Court to first overturn the assessment. The requirement to first overturn the original administrative decision was em- phasized by the Court of Appeal in Grenier when it noted:

To accept that the lawfulness of the decisions of federal agencies can be reviewed through an action in damages is to allow a remedy under section 17. Allowing, for that purpose, a remedy under section 17 would . . . disregard or deny the intention clearly expressed by Parliament in subsection 18(3) [of the Federal Courts Act] that the remedy must be exercised only by way of an application for judicial review.166

The court further noted:

The principle of the finality of decisions likewise requires that in the public interest, the possibilities for indirect challenges of an administrative decision be limited and circumscribed, especially when Parliament has opted for a procedure for direct challenge of the decision within defined parameters.167

It is especially important not to allow a section 17 proceeding as a mechanism for reviewing the lawfulness of a federal agency’s decision when this indirect challenge to

162 2005 FCA 348. See also Michael F. Donovan, “When Public and Private Law Collide: The Relationship Between Judicial Review and Tort Remedies in Claims Against the Federal Government” (2007) vol. 33, no. 3 The Advocates’ Quarterly 355-74, at 356-59, which provides an excellent analysis of the Grenier decision. 163 (2004), 244 DLR (4th) 422 (FCA); leave to appeal to SCC refused (2004), 246 DLR (4th) viii. 164 Grenier, supra note 162, at paragraph 20; applied in Canada v. Prentice, 2005 FCA 395, at paragraphs 31-33; leave to appeal dismissed [2006] SCCA no. 26. At paragraph 23 of Grenier, the court also favourably cited The Queen v. Capobianco, 2005 QCCA 209, in which the Quebec Court of Appeal held that an action for damages brought in the Superior Court of Quebec was premature because the plaintiff ’s claim was based on the premise that the decisions made in relation to him by the federal tribunals that allegedly caused the damages were illegal. 165 [2005] 1 SCR 146, at paragraphs 11 and 42 (in the context of statutory review under the Public Service Staff Relations Act). See also Roitman, supra note 122, at paragraph 16. 166 Grenier, supra note 162, at paragraph 25. 167 Ibid., at paragraph 31. 700 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

the decision is used to obviate the mandatory provisions of subsection 18(3) of the Federal Courts Act.168

Given the structure of sections 18.1 and 18.5, these cases are informative in defining the line between tax appeal procedures and actions for damages in superior courts. For cases where the impugned decision is an assessment of tax, Parliament has created a specialized court with a comprehensive statutory appeals process. Challenges to the lawfulness of tax assessments can only be reviewed by the Tax Court of Canada under the appeal provisions of the Income Tax Act. While the taxpayer might be able to launch an action in the Federal Court based on allegations of impropriety relating to the administration of tax law, he or she would, at the very least, be required to first successfully challenge the assessment in the Tax Court.169 To permit a taxpayer to bring an action for damages based on an allegation of an unlawful assessment of tax without a decision of the Tax Court would disregard the clear legislative objective expressed through the operation of sections 18, 18.1, and 18.5 of the Federal Courts Act, subsection 152(8) of the Income Tax Act, and section 12 of the Tax Court of Canada Act, and would undermine the effectiveness of the tax appeal mechanism.

Recent Class Action Cases Tax practitioners generally do not become involved in litigating class action suits; such actions are commonly reserved for practitioners in other areas of the law, such as tort. It is therefore a little surprising that the jurisdictional dividing line has been reinforced by two court of appeal decisions relating to proposed class actions. In Smith et al. v. Canada (Attorney General)170 and The Queen v. Roitman,171 both of which were decided after the Ho-A-Shoo case,172 the courts concluded that the proposed class actions should be struck on the basis of the jurisdictional limitations of superior courts in tax assessment matters. In Smith, the taxpayers brought a proposed class action in the British Columbia Supreme Court, naming several bodies and representatives of the federal government as defendants. The taxpayers were truck drivers who claimed that they should be allowed deductions for meals at the same rate used by the federal government to reimburse federal employees. While the statement of claim was based on causes of

168 Ibid., at paragraph 33. 169 I do not suggest that such a claim could be successful in any event, since a taxpayer likely could not establish the elements of a tort claim if he or she successfully appealed the assessment. See Canus v. Canada Customs, 2005 NSSC 283, at paragraph 104, where, in dismissing a lawsuit against the CRA for negligence in raising an assessment, Hood J suggested in obiter dicta that the objection and appeal process to the Tax Court provides a “complete remedy” in such circumstances. 170 2006 BCCA 237; leave to appeal refused (2006), 362 NR 400 (note). 171 Supra note 122. 172 Supra notes 82 and 86. the jurisdictions of the tax court of canada and other superior courts n 701 action including negligence, breach of fiduciary duty, and alleged breaches of sections 8 and 15 of the Charter, the British Columbia Court of Appeal upheld the decision of the trial judge to strike the claim. In so doing, it found that the allegations relating to the common-law causes of action set out in the statement of claim were in reality a challenge to the assessment.173 The facts in Roitman presented a more subtle situation. The taxpayer filed a statement of claim in the Federal Court as a proposed class action. The statement of claim alleged that the cra had engaged in misfeasance of office, negligence, and abuse of process by developing and following a policy that allegedly ignored a decision of the Federal Court of Appeal relating to adjustments to shareholder loan accounts.174 The statement of claim alleged that this policy was then applied in assessing the plaintiff, who, among other things, sought exemplary and punitive damages. The statement of claim was thus framed in terms of an abuse of process based on the creation and application of the “illegal” policy, and not as a challenge to the assessment.175 The Federal Court dismissed the Crown’s application to strike the plaintiff ’s statement of claim. The decision seemed to hinge on the finding that the Court of Appeal’s decision in Swift 176 was determinative of the issue. This was evident in the following passage:

In Swift v. Her Majesty the Queen, Justice Sexton wrote for the Federal Court of Appeal: The claim being advanced by the Appellant, although it labels the assessments as fraudulent, does not seek to set aside the assessments. In essence, it is a claim for damages for fraudulent actions on the part of officials of the ccra during the assessment process. This claim for damages has not been previously decided by the Tax Court of Canada and is not within the jurisdiction of the Tax Court of Canada. . . . I am satisfied that the same could be said here.177

173 Supra note 170, at paragraphs 11, 14, and 15. The court dealt separately with the allegations of Charter breaches. For a similar outcome in an action launched against the CRA for “negligence” in assessing a third party, see 7837783 Alberta Ltd. v. Canada (Attorney General), 2007 ABQB 348. 174 Roitman, supra note 122. The court noted, ibid., at paragraphs 17 and 18, that the statement of claim alleged that the minister deliberately misapplied the law expressed in the decision of The Queen v. Franklin, 2002 DTC 6803 (FCA). In Franklin, at paragraph 6, the Federal Court of Appeal dismissed the Crown’s appeal from the decision of the Tax Court of Canada, finding, “Normally, it is for the trier of fact to determine whether a benefit is conferred for purposes of subsection 15(1). . . . Beaubier, J.T.C.C. concluded that what occurred here was a series of bookkeeping errors but that the respondent received no benefit. I am unable to find any palpable or overriding errors in his assessment of the facts that would justify this Court interfering with his decision.” 175 See Roitman, supra note 122, at paragraph 17 (where the reasons reproduce portions of the statement of claim) and paragraph 25. 176 See supra note 141 and the accompanying text. 177 Roitman v. Canada, 2005 FC 1385, at paragraph 19. See also paragraph 13 of the FCA decision, supra note 122. 702 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

However, the Federal Court of Appeal reversed the lower court’s decision, granting the Crown’s motion to strike the plaintiff ’s statement of claim. In so doing, the Court of Appeal was careful to reduce the impact of its previous decision in Swift. First, it noted the peculiar facts in Swift, confirming that the court had given the taxpayer “the benefit of the doubt in exercising its discretion at the stage of a motion to strike.”178 In particular, the court noted that one of the taxpayer’s allegations was that the cra had arranged with the trustee in bankruptcy to discontinue his appeals in the Tax Court. Indeed, it is not clear exactly what was being alleged by the taxpayer, and while the notion of a conspiracy between the cra and the trustee may have been unsubstantiated, the court’s role on a motion to strike a claim is not to test the evidentiary basis of the allegations. Any such allegation could be addressed only in an action, and not in the context of an appeal before the Tax Court.179 These two class action cases seem to have reinforced the law on the issue of jurisdiction in tax-related matters, while reducing the impact of decisions such as Swift to their proper factual context. The courts soon considered yet another twist in a case involving judicial review, Addison & Leyen, discussed below. However, a review of the context of the case demonstrates that the general principles established in previous jurisprudence in this area have not changed.

The Addison & Leyen Decision Given the recent decision of the Supreme Court of Canada in Canada v. Addison & Leyen Ltd.,180 it would be natural to consider how that decision fits in with prior jurisprudence relating to the principles for determining the respective jurisdictions of the Tax Court and the Federal Court. While requiring some explanation, the issue in Addison & Leyen was considerably narrower than, and does not affect, the broad issues addressed in this article. The case deals with the Federal Court’s ability to consider, by way of judicial review, the minister’s decision to make an assessment under section 160 of the Income Tax Act. The taxpayer filed applications for judicial review of its income tax assessments. While it is clear in most cases that taxpayers cannot seek judicial review for tax assessments by virtue of section 18.5 of the Fed- eral Courts Act, the taxpayer argued that its case was distinguishable. Section 160 of the Income Tax Act, a form of secondary assessment, permits the minister to assess a third party, who is not at arm’s length from the taxpayer and who receives a transfer of assets from the taxpayer without providing adequate consideration, at a time when the transferor is liable for taxes. As a collection tool directed at anti- avoidance, section 160 expressly permits the minister to raise an assessment “at any

178 Roitman, supra note 122, at paragraph 27. 179 The Ontario Superior Court of Justice came to this conclusion in Obonsawin, supra note 124. At paragraphs 6-7, ibid., Belobaba J characterized the “heart of the action” as abuse of power, and not the correctness of the GST assessment. The decision of Belobaba J was overturned for other reasons: see supra note 124. 180 2007 SCC 33. the jurisdictions of the tax court of canada and other superior courts n 703 time.” The act of raising an assessment under this provision is thus not subject to the ordinary time periods for assessment set out in the Income Tax Act.181 It thus purports to allow the minister to assess without being subject to any statutory time constraint.182 The taxpayer’s application focused only on the delay in raising the assessment. While a taxpayer can appeal a section 160 assessment by reference to the elements of that section (for example, by proving that adequate consideration was provided, or that the asset was not transferred to the party assessed), the Tax Court would have no basis to vacate or set aside an assessment as a result of any “delay” by the minister in assessing, that being an issue of process. The Federal Court therefore considered whether there was any way for a taxpayer to challenge an assessment on the narrow issue of the minister’s purported delay in assessing. The motions judge struck the judicial review application at first instance. How- ever, the Federal Court of Appeal overturned the decision of the lower court, and found that the application for judicial review of the section 160 assessment ought not to be struck. In so finding, the majority appeared to focus on the fact that absent a judicial review, no court could review the minister’s exercise of his discretionary power to raise an assessment, which would thus be unlimited by any statutory time constraint.183 The majority of the Federal Court of Appeal found that the right to appeal a section 160 assessment was not an adequate remedy to address any improprieties in the exercise of the minister’s discretion that related to the time frame of the assessment. The majority also confirmed that, while a taxpayer can pursue damages in the Federal Court on the basis of allegations of impropriety arising from the administration of tax provisions, he or she is required to first challenge an administrative decision by way of judicial review rather than by way of an action for damages. The majority confirmed that an action for damages is not an appropriate avenue to address any delay by the minister by concluding,

[g]iven the state of the jurisprudence, it is not possible to conclude that if the appel- lants are barred from seeking judicial review in this case, an action for damages would be an adequate alternative remedy (assuming they are able to prove their allegations).184

The majority decision did not appear to accept that the words “at any time” in section 160 would preclude the possibility of any recourse on the narrow issue of a delay in assessing. The dissenting reasons of Rothstein ja (as he then was) expressed

181 Markevich v. Canada, [2003] 1 SCR 94, at paragraph 16. 182 Such a broad discretion is not without reason. While it may be (and often is) difficult to ascertain a taxpayer’s income in a self-reporting system, it is arguably even more difficult for the minister to detect non-arm’s-length transfers in situations that give rise to a section 160 assessment. 183 Addison & Leyen Ltd. et al. v. The Queen et al., 2006 DTC 6248 (FCA), at paragraphs 73-74. 184 Ibid., at paragraph 78. 704 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3 the idea that the words “at any time” found in section 160 clarified Parliament’s intention to leave this discretion to the minister, notwithstanding any harsh results that might follow.185 In July 2007, the Supreme Court of Canada allowed the minister’s appeal, essentially agreeing with the dissenting reasons in the Federal Court of Appeal.186 In any event, this decision does not address the broad overriding issue of jurisdiction resolved in the long line of cases delineating the jurisdiction of the Tax Court and the Federal Court.187 However, the Supreme Court appeared to reinforce the importance of the integrity of the tax appeal process in stating that the procedure of judicial review in the Federal Court “should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court.”188

Conclusion It is apparent from a review of the case law that in defining the line between the jurisdiction of the Tax Court and that of superior courts over time, the courts have been required to draw some fine distinctions. One of the limitations to the development of the law is that there are several courts that have interpreted the relevant statutes and jurisprudence in this area, each from its own perspective. The Tax Court of Canada examines its own jurisdiction, as does the Federal Court and each superior court of the provincial jurisdictions. Notwithstanding any principle of judicial comity, the decisions of these different courts are not binding on the others. Even where these cases are appealed from the lower courts, only Federal Court and Tax Court cases go to the Federal Court of Appeal; appeals of decisions of provincial superior courts are decided by the provincial appellate courts. Despite only limited guidance from the Supreme Court of Canada, the lines demarcating the jurisdiction of the Tax Court as against that of the provincial superior courts or of the Federal Court have become even clearer in the case law since 1984, when the Federal Court of Appeal issued its decision in Parsons. While minor com- plications have arisen, there are certain principles that might be extracted from the jurisprudence:189

185 Ibid., at paragraphs 87-90, 92, 97, and 101. 186 Supra note 180, at paragraph 9. 187 Ibid., at paragraph 8. The case turned on the specific interpretation of section 160. It is worth noting that the Supreme Court of Canada had previously dismissed leave applications in cases where a broader issue of jurisdiction was determined: see Roitman, supra note 122, and Main Rehabilitation Co. Ltd., supra note 135. At paragraph 8 of the decision in Roitman, the Court of Appeal itself was careful to restrict the application of the majority decision of the Court of Appeal in Addison & Leyen Ltd. (which was later overturned) to its narrow circumstances. 188 Supra note 180, at paragraph 11. 189 In setting out these observations, I would like to reiterate that this article has only provided an overview of the some of the relevant law; it is not intended to be comprehensive. Further, it merely suggests certain trends in the law. The relevant law should be consulted for any particular situations. the jurisdictions of the tax court of canada and other superior courts n 705

1. There is little, if any, overlap between the jurisdiction of the Tax Court and the Federal Court or other superior courts. If the Tax Court of Canada has jurisdiction to deal with the issue, then a different superior court generally does not, and vice versa. This symmetry arises largely from the presence of section 12 of the Tax Court of Canada Act, and in the case of the Federal Court, from section 18.5 of the Federal Courts Act. This symmetry, however, is not perfect. It can be limited, for example, by the clear words of the Income Tax Act. Thus, the length of delay in assessing is not a ground for judicial review where the charging section permits an assessment at any time.190 2. The principle of res judicata ought not to arise as between decisions of the Tax Court and other superior courts. If the Tax Court properly considers an assessment issue within the context of the appeal, that is clearly a subject matter that is not within any other court’s jurisdiction. If the subject matter is one of process, res judicata should not arise since the Tax Court does not have jurisdiction over issues of process. The courts have possibly referred to the principle of res judicata to clarify the true subject matter of the proceeding at issue, and to emphasize that the specific case is doomed to fail in any court because the issue has not been resolved by the court with jurisdiction. 3. Collection matters (where the amount assessed is not at issue) do not fall within the Tax Court’s jurisdiction. They must be addressed in other superior courts, and frequently, in the Federal Court.191 This exclusion does not, of course, apply to assessments, even those referred to as “collection assessments,” such as a transfer assessment under section 160 of the Income Tax Act, or an assessment of a third party who has failed to pay a statutory garnishment for an amount owing to another tax debtor under subsection 224(4) of the Act. The merits of the assessment in such cases are to be determined, as in the case of any other assessment, by the Tax Court. 4. Other superior courts can only deal with matters that are ancillary to an assessment. In determining whether a matter is truly ancillary, the court is to apply a narrow interpretation of the law. Even where the subject matter and the procedure would normally fall within the superior court’s jurisdiction, the superior court cannot purport to determine the issue if the decision or the relief sought would effectively undermine the validity and quantum of the tax assessment. Any such decision would not, in any event, bind the Tax Court. 5. Provincial superior courts have used the ability to decline jurisdiction in matters where the court perceives some form of concurrent jurisdiction over the

190 Addison & Leyen Ltd., supra note 180, at paragraph 10. The court, however, mentions the possibility of obtaining the remedy of mandamus to “prod” the minister to act with due diligence in response to an objection. 191 For example, a taxpayer who seeks to challenge a certificate or writ that has issued from the Federal Court will clearly have to launch proceedings in that court. 706 n canadian tax journal / revue fiscale canadienne (2008) vol. 56, no 3

matter at issue. There are sound reasons for superior courts to exercise this discretion in such circumstances, and they are most likely to defer to the Tax Court’s expertise. 6. Cases involving rectification proceedings might be considered an exception to the general rule precluding other superior courts from rendering decisions directed at dictating a tax outcome. While rectification orders affecting tax matters were initially based on the premise that they were not merely tax- oriented, superior courts have, rightly or wrongly, considered rectification orders even where the only purpose is to alter the tax outcome. Since the Tax Court has no jurisdiction in equity and cannot grant a remedy based only on equitable principles,192 it cannot grant an order of rectification.193 For the reasons above, because such orders tend to tread so closely to the exclusive jurisdiction of the Tax Court, applications for rectification orders should be served on the minister of national revenue.194 Otherwise, the Tax Court may not consider itself bound by a decision of another superior court in such a situation. 7. To the extent that rectification might be considered a means by which provincial superior courts can affect the tax implications of a particular transaction, it is not applicable to other situations. Rectification case law only applies to rectification cases. It has no application or impact on cases where the rectification remedy is not available, and where the party merely seeks a declaration that purports to affect the tax implications of a transaction. 8. The form of relief requested by the taxpayer is not determinative of a court’s jurisdiction. Even where the taxpayer does not seek to specifically set aside the assessment, he cannot initiate an action for damages or declaratory relief in a provincial superior court or the Federal Court if the claim for that relief is in any way premised on the unlawfulness or invalidity of the tax assessment. Similarly, the taxpayer cannot rely on issues of process in the Tax Court to obtain the relief of vacating the assessment. 9. Other superior courts can only deal with issues of abuse that pertain to matters of process, and not issues relating to the substance or merits of the assessment. In suing the Crown in such circumstances, the plaintiff must necessarily accept that the assessment was lawful and correct, and establish the elements of tort law or contract law in relation to some matter of process (such as a

192 See Chaya, supra note 107; and Hamilton, supra note 11. 193 See also Stern, supra note 108, at paragraph 30, though Paris J does not specifically reference a lack of jurisdiction in equity. 194 There are, however, other rationales for requiring service of rectification proceedings on the minister. For example, a transaction that technically triggers a liability makes the minister a creditor, irrespective of a formal assessment, by virtue of subsection 152(3) of the Income Tax Act. the jurisdictions of the tax court of canada and other superior courts n 707

breach of a test-case agreement or a limitation issue). Alternatively, the taxpayer must first establish the invalidity of the assessment itself through the tax appeal system before he can attempt to claim damages arising from the assessment itself.195

Given the amount of activity in the area in the last five years, most notably at the Federal Court of Appeal and the Federal Court, but also in provincial superior courts and the Tax Court, the parameters of jurisdiction appear to have been extensively canvassed and tested. If anything, the decisions in the last few years have become somewhat redundant. As stated at the beginning of this article, in order to determine jurisdiction, it is important to consider all of the relevant case law in its proper context and, most importantly, in the context of the specific factual situation. A careful analysis of the specific factual situation in each case would likely serve to brighten what is sometimes a fine but distinct dividing line between the jurisdiction of the Tax Court and the jurisdictions of the other Canadian superior courts.

195 I do not suggest that such a claim could be successful, since a taxpayer likely could not establish the elements of a tort claim if he or she successfully appealed the assessment. See Canus, supra note 169, noting Hood J’s obiter dicta at paragraph 104.